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Investing for Income

By Bruce C. Miller, CFP™


In my continuing service to the retired community, this month I am offering a somewhat lengthy article on the somewhat lengthy topic of income investing. In all fairness, this topic could easily fill a book…but this would be a bit much for a newspaper. So I’ve necessarily reduced the size and scope of this article, while still getting across the important points. It is my intent to provide each of you with enough information to prompt you to look more deeply into the subject matter on your own or to speak with greater understanding to your investment advisor. And unlike so many articles on investing, this is not a rehashing of the basics, but instead assumes you already understand the fundamental concepts. But lets start with a brief review.

In each individual’s or family’s funds for investment, there should be 2 or 3 separate and distinct components: Emergency Cash Reserves, Growth investments and for those in retirement, Income Investments.

Emergency Cash Reserves normally represent 3 to 6 months of family expenses that are held in a highly ‘liquid’ cash account, such as a pass-book savings account, money market account, short term government bond mutual fund, cash value life insurance and/or 30 day Certificate of Deposit (CD). This is money that is not so much invested as it is simply held in a safe and secure account with ready access for emergencies, should it be needed. The stated interest rate on these money ‘instruments’ is secondary in importance; whether this money earns 4.2% or 4.6% really doesn’t matter very much….that it is readily accessible and convertible into cash without losing principal, is important. This must be a part of each family’s financial plan.

Growth investing is investing we think of in the classical sense; we buy stocks or real estate or rare collectibles with the hope that these items will grow in value (after expenses and taxes) faster than inflation (hopefully much faster), and that we will sell these at a later date for more than we paid for them. Simple enough. However, growth investing produces little or no income as it grows. In fact, some growth investments require us to pay money out while we hold them; for example, property taxes on bare land. Therefore, growth investing generally requires a longer time horizon (usually at least 5 years), patience and the discipline to leave things alone while they grow. Almost without exception, I advise my clients to build and maintain a growth portfolio of investments, ranging from 100% of investment assets for young (under 45) ‘accumulators’ but never dropping to less than 10% of investment holdings, even for those who have reached their 100th birthday!

Income investing, or, ‘income-only investing’ as I call it, is concerned only with generating current income from your investments, which you then combine with retirement pension and social security income, to provide the lifestyle you wish to enjoy. This lifestyle may include simply living on the income you generate each month, gifting moneys to family, church or charity or saving up for short-term purchases of durable items like appliances, a car, or your grandchild’s next semester’s college tuition, to name a few. ‘Income-Only’ investors usually start income investing in their 50’s or 60’s, but some begin much earlier if they have the financial means to do so. What differentiates income-only investing from growth investing is the wish to produce regular, stable and recurring income to be used for immediate or short-term needs. However, individuals who are in the growth or accumulation phase of their working lives do not need income…they need growth or capital appreciation. Therefore, I do not recommend income investing to those who are greater than 5 years pre-retirement.

The remainder of this article deals with that portion of your investments you wish to produce income, using readily available income securities that have their own trading symbol, are openly traded on the large national exchanges (such as the New York Stock Exchange) or even on local exchanges, and are available through your brokerage account. The purpose of this article is to help you become a better ‘income-only’ investor, or at a minimum, to be a better consumer if you retain the services of an investment advisor. It is NOT the intention of this article to recommend any specific security. I will mention specific securities for the sake of illustration or as a place to begin your research; but I do not recommend them or recommend against them.

Definition: Income-only investor: One who invests his/her funds solely for the purpose of producing regular and stable current income. Income investments are analyzed and chosen for their ability to produce a regular and stable dividend. Once purchased, any growth or devaluation of the security is irrelevant; only the continuity and stability of the dividend matters.

There are many investments available today that are concerned with producing income. I group them into 3 categories:

Category 1 we are all familiar with. This includes passbook savings accounts, money market accounts, short-term government bond mutual funds, money market mutual funds and 30 day or shorter CD’s. I consider this category to actually be places for an Emergency Cash Reserve rather than income investments. After income taxes and the affect of inflation, the real yield is often close to zero, even though these investments are safe and often insured against loss. But as an income investment, due to their very low yields, I usually do not recommend them.

Category 2 are financial ‘products’ often marketed by insurance companies and brokerages. These include annuities, unit investment trusts, load mutual funds and individual bonds. Caution and prudence are the order of the day here. What must be remembered by you, the consumer, is that the sales person bringing you these products are under considerable pressure to sell them and they may not have the credentials or training of an objective investment advisor or financial planner. This doesn’t mean that you shouldn’t consider the investment product. It does mean that you need to do your homework. Like buying a car, a house or a vacation time-share, you need to read the ‘fine-print’, get a second opinion, read independent reports and consumer guides and speak to those you personally trust who have experience with these products. It is an unwise consumer who would buy these (or other) products only at the urging of the salesperson. Once you get a clear idea of the financial products being sold, careful research will often show that the securities being sold are expensive and overpriced, when sales commissions and/or on-going ‘management fees’ are taken into account. These additional expenses will come directly out of the dividends you make, thus reducing the return on your income investment.

A word here on individual bonds. This is considered by many to be the staple of "fixed-income" investing, and in theory I believe this to be true. However, the costs of buying and selling bonds can be quite expensive. Unlike stocks, bonds are usually sold from an ‘inventory’ of bonds held by the brokerage instead of from the current owner of the bond in the marketplace. The brokerage then builds into the price of the bond their commission. For example a Coca Cola bond issued at $1,000 with an ‘A’ credit rating can be bought today for $1,017.70 with a coupon yield of 6.75%, maturing in 2019. The current yield is 6.63%, which is calculated by dividing the annual dividend, $67.50, by the purchase price of $1,017.70, and in the final year of 2019, you would receive back $1,000, meaning you would have a loss of $17.70 in that year, which will reduce the final year’s return to $67.50-$17.70 = $49.80 or 4.89%. The quoted yield is often given as the ‘Yield to Maturity’. Be careful here. Yield to Maturity assumes you are going to reinvest the bond interest payments immediately when you receive them at the same rate of return as the yield to maturity of that bond. But as an income investor you will not be doing this. Thus Yield to Maturity is of no value and current yield (as shown above) is what you must use to compute the bond’s actual (current) yield. There are a small number of individual bonds that are traded on the New York Stock Exchange. These ‘exchange traded’ bonds are purchased through your brokerage account. However, the brokerage commissions to buy these bonds can be very high. For example, on the Coca-Cola bond above, the commission at Fidelity Brokerage is $36 plus $4 per bond, or $40. Thus, the first year’s net interest payment on one bond, assuming the bond can be purchased for $1,000, will be $67.50 - $40 = $27.50, or 2.75%, then jumping to the coupon rate of 6.75% for the remainder of the time it is held. And remember, Fidelity is a discount broker; a bond brokerage commission for exchange traded bonds will no doubt be much higher. In addition, bonds make their interest payments twice each year, which can cause a cash-flow problem to income investors, who need a relatively steady monthly or at a minimum, staggered quarterly cash flow stream. Bond brokers will often recommend that bonds be ‘laddered’; that is, maturity dates staggered so that the income stream is spaced more closely together and as older bonds mature, newer bonds of longer maturity will be added. This is a great strategy, were it not for the brokerage commissions, which can become quite large. Again, if you intend on purchasing and holding individual bonds, be ever cautious of brokerage commissions and calculate the current yield of the bond…ignore the yield to maturity (YTM) yields that are usually quoted.

Category 3 are income investment securities we don’t hear about very often but are readily available to all. We don’t hear about them because there usually are rarely any middleman or intermediary who can profit by their sale. These include Real Estate Investment Trusts (REITS), Preferred Stocks, Utilities, No-load Open-End mutual Bond funds, Closed-End Mutual Bond Funds, distressed dividend paying stocks, Royalty Trusts, Master Limited Partnerships and, for lack of a better term, Bond ‘mutants’. These investments are all available on stock exchanges (most on the New York Stock Exchange), each has their own stock symbol (for example, the Strong Corporate Bond Fund = STCBX) and are available through all brokerage services for their normal brokerage commission, such as Fidelity, E-Trade, Schwab or Waterhouse, to name a few. Many open-end bond funds are available as ‘No Transaction Fee’ funds, meaning there is no brokerage commissions paid at all. Most of these individual securities do not have a large trade volume per day, or they are ‘thinly traded’, meaning that emergency liquidation may result in selling for below listed daily prices. Having at least a medium-term income investment horizon (at least 4-5 years) is crucial to investing in these securities. Also, be forewarned; brokers and securities dealers tend to dislike this category of investment. They usually view these as slow and boring, unlike shares of large, popular companies that move quickly and generate significant brokerage commissions. However, this should have no bearing on your interest in the security.

Before I begin talking about Category 3 investment securities, let me pause to talk a bit about risk. Risk defined is the likelihood that your investment will perform worse than you anticipated. A high-risk, high-dividend paying stock, for example, has a higher risk of not being able to sustain its high dividend than a low risk dividend paying stock. The trade-off, of course, is that the higher risk stock will pay a higher dividend yield…sometimes, much higher. No one can predetermine your tolerance for risk…only you can do that. Your values, your needs, life experiences and your understanding of the investment universe determine your risk tolerance. Ideally, you should take only that level of investment risk you must take to generate the income you need to supplement other retirement income to provide the lifestyle you desire. That’s it! For example, let’s say you wish to retire at an $80,000 annual gross income (before tax). Let’s say your company’s pension income is $32,000 and your social security is $22,000 for a total of $54,000. This means your investments will need to generate $80,000 - $54,000 = $26,000 annually. If you have $520,000 to invest for income (remember, your growth investment and Emergency Cash Reserve are separate from this), you will require only a 5% current income dividend rate to meet your $80,000 annual income requirement. Thus, you can invest in very low risk investments (unfortunately, I don’t see this situation very often). But if you have $260,000 to invest for income, you will have to earn a 10% dividend. This will require a considerably higher level of investment risk. And if you have $217,000 to invest, you will have to earn 12% to meet your goal. This rate is possible, but you will have to take more investment risk. I always recommend that my clients take no more risk than they absolutely have to to meet their goals. The problem comes when clients have to take more risk than they are comfortable with. For them, they must either learn to accept more risk or reduce their lifestyle expectations. The third alternative is to gradually consume the retirement nest egg. There are several published methods for doing this…none of which I like very much, as they rely on timing investment sales to market cycles, on prolonged market gains as we have enjoyed since the early 1980's or on life expectancy from standardized tables. If this is the only option, I use it sparingly, employing conservative withdrawal strategies, for once each invested dollar is consumed, it is a dollar no longer available to work for them. And if you consume your assets while you are still alive and healthy (at your 90th birthday??), you will have nothing! Financial Planners call this superannuation: you’ve outlived your assets.

Now, lets look at Category 3 income investment securities.

1. Real Estate Investment Trusts (REITs). This is my staple of income investing and usually makes up 25 – 30% of an investment portfolio, with no single security (of any type or class) making up more than 3% of the value of the income investment portfolio. It is a unique security that acts partly like a normal publicly traded corporation (like IBM), but also acts like a limited partnership. To be a REIT, the IRS requires the company to derive at least 75% of its income from Real Estate operations, to hold the Real Estate an average of at least 4 years and to distribute at least 90% of its net income to shareholders each year and 100% of capital gains (gains on the sale of Real Estate). If a REIT meets these (and other) requirements, the earnings are not taxed at the REIT level…instead they are taxed at the shareholder level, much like a partnership is taxed. This is a distinct advantage over C-Corporations (like IBM) who must pay income tax on their net earnings at the corporate level and then shareholders (investors) must pay income tax on any earnings that are distributed to them in the form of dividends. In effect, dividends are taxed twice in a C-Corp. But in a REIT, they are taxed only once. And because the REIT must pay out most or all of its net earnings, this usually creates a very attractive dividend yield for the investor. There are currently about 194 REITS available to the public on the New York, American and NASDAQ stock exchanges, and they trade like any stock. There are many types of REITS, to include those who invest only in Office buildings, Hotels, Hospitals/Clinics, Apartments, Personal Storage, Retail Chains, Malls, Restaurants, Residential loans, Golf courses and Industrial and commercial mortgage loans. REIT dividend rates today run between 2 or 3 % to over 15%. Care must be taken to pick REITs who have a proven history of continuous and steady dividend payments, who have seasoned and experienced managers and who hold and manage properties in many regions of the country (geographic diversification). A full listing of REITs can be found on the web site of the National Association of REITs (NAREIT) at, who also have a nice primer that will explain the basics of REIT investing. Detailed analysts of REIT’s include Fitch (, FBR ( and Green Street Advisors ( Greenstreet Advisors and Fitch now charge a fee for their detailed analysis, while FBR offer some of their research for free.

2. Preferred Stocks, which usually make up 20 to 25% of my income investment portfolio, are stocks issued by usually larger financial or utility companies in addition to their common stocks. From an investment standpoint, preferred stocks act somewhat like common stocks and somewhat like the company’s bonds. Like the company’s common stocks, preferred stocks are traded on the major stock exchanges and are available for purchase by any American citizen through their brokerage account. But like the company’s bonds, each preferred stock is issued with a fixed dividend payment (with a notable exception called a ‘floating preferred’…but this is rare) that is payable, usually quarterly (a few pay monthly). The primary advantage of preferred stock dividends is that they must be paid before common stock dividends. In other words, if the common shareholders get a dividend, the preferred shareholders will be guaranteed theirs. But unlike bond interest payments, the issuing company does not have to pay preferred dividends to stay in business. Most preferred stock are ‘cumulative’. This means that if the company elects to ‘skip’ a dividend payment, that payment and any others in arrears, must be paid to the preferred stock shareholder before any dividend payment is made to common shareholders. In other words, as a preferred stock shareholder, you get paid dividends before common stock shareholders, but after interest payments to bondholders. Most cumulative preferred stocks are issued at $25/share and most can be redeemed by the issuer anytime after 5 years following issue. This means that if a company issues preferred stock in November 1998, the company may elect (but is not required) to redeem all preferred stock at $25/share in November of 2003. If you buy the preferred stock at, say, $20/share, you will enjoy a 25% capital appreciation from the time you purchased the preferred stock until it is redeemed. Some preferred stocks are ‘perpetual’, meaning they are never redeemed. The two main risks associated with Preferred Stock is that the company may ‘skip’ dividend payments, a rare occurrence, or that the company will simply go out of business, which is also a risk to the bond holders, albeit a very low risk. The other risk to Preferred Stock holders is something called ‘reinvestment risk’. This means that if you buy Preferred Stock shares at $20 per share, enjoy a 10.5% dividend payment (paid quarterly) for 4 years and then the company redeems your shares for $25 per share, you now have cash to reinvest. This is much like owning a bond that is ‘called’ by the issuer. But what drove up the price of your Preferred Shares was lowered interest rates, which means your next income investments will be at a lower rate of return. The 10.5% dividend return you were getting is now down to, say, 8.25% for a similar preferred stock at today’s interest rates, although due to the increase in the preferred stock price, you have more money to invest.

There are virtually no analytical services that review preferred stock. Fitch investors’ service ( is the only on-line independent analyst who reviews and rate preferred stock that I have found, but you will need to know the name of the company issuing the preferred stock. Investor’s Business Daily has a section in the securities listings for preferred stock. In analyzing preferred stock, the analyst usually rates the preferred stock on the company’s ability to meet is recurring fixed preferred stock expense, referred to as fixed-cost coverage ratio. If a company has a total preferred stock dividend of, say, $2 per share, the acceptable coverage ratio would require the company to have after tax net earning per share of at least $4. This is a 2 to 1 coverage ratio. The better preferred stock will have a coverage ratio of 3 to 1, or, as in the example above, have net earnings per share of $6. What I look for are trends in fixed cost coverage ratios. A company who has progressively gone from a 3:1 ratio to a 1.5:1 ratio is going in the wrong direction, and unless the company management can offer a compelling reason why this negative trend is occurring and how they intend to remedy it, or if they don’t speak to it in their annual report to shareholders, I look elsewhere, regardless of how attractive the dividend yield is.

3. Open-End bond funds represent another 25 to 30% of my income investment portfolio. But unlike individual securities, its overall weight in the portfolio may reach 10% per fund, as the fund is a diversified portfolio already. I select 3 to 5 bond funds to represent a diversity of bond classes (see below). These funds are like all open-end mutual funds, in that the fund manager sells shares of the mutual fund to the general public, and with this money, purchases bonds in the open marketplace that are placed in the fund. Interest from all bonds is collected in the bond mutual fund and paid out to investors monthly, after the mutual fund takes out their own operations fees and administrative expenses. Open end Bond funds have two broad measures of performance that investors are concerned with; total return and income return. Total return represents the change in value of all of the bonds in the fund plus the interest that is collected by the fund. Income return is simply the collective interest (or dividend) payment that is paid each month per share. So if an income investor buys 100 shares of a mutual bond fund that pays on average $.087 per share per month, this means the investor will receive about $1.044 per share per year. If the investor paid $9.85 per share for the fund, his income current yield will be $1.044/$9.85 = 10.6%. This is what the income investor is concerned with…not the fluctuations in the market price of the bond fund, which will certainly go up and go down, depending on the market interest rates and/or other factors. Therefore, I tend to ignore the ‘total return’ numbers reported for bond funds, and analyze open-end bond funds on the continuity and stability of the monthly dividend payment history.

There are currently over 2,180 open-end bond funds, but 1,350 of these carry a sales load. There is simply no reason to pay a sales commission on an open-end bond fund. The 830 true no-load bond funds offer a wide variety to choose from. Classes of bond funds range from mortgage backed bonds (such as GNMA or FNMA residential mortgage bond funds) to corporate ‘investment grade’ bond funds, to municipal bond funds (tax free for federal income tax) to high-yield (higher risk) corporate bond funds to Government (treasury bills, notes and bond) funds. This seems like a complicated array of bond funds to choose from, but to the income investor, the choices are quite simple: select those bond funds with a proven track record of at least 5 years of a steady, constant and stable monthly dividend payment. The only web site that I have found that will give you historic dividend payments is Microsoft’s Money Central. Go to Type in the stock or mutual fund symbol, then click on ‘Chart’, and once the chart comes up, click on ‘Price History’, which will give you a historic chart of the company, to include the dividend history. Point with your mouse to the ‘D’ for dividend, and it will give you the date and amount of the historic dividend from the chart. I simply list the data in an Excel spreadsheet and draw a chart over 1, 3, 5 and, if available, 10 years. The best bond funds will show a gradually rising dividend. The funds to avoid are those that have a steadily decreasing dividend over the years.

4. Utilities have a long history of paying steady, constant and reliable monthly or usually quarterly dividend payments. When owned as a public utility, the management of the utility had the power to periodically request increases in rates usually in step with the gradual increases in the cost of gas or electricity or coal, and to pay out a constant and steady dividend to holders of utility stock. However, with deregulation of public utilities, this historically steady dividend payment has come under pressure. Now as utilities are deregulated, each utility has to compete with other area utilities or energy suppliers to offer their commodity (electricity, natural gas or phone service) at the lowest rate so as to attract as many customers as possible, yet still remain financially strong and attractive to investors. This has thrown a large dark cloud over the future of constant dividend payments. For if a utility looses customers to a competitor or must pay a higher price for the natural gas or electricity that they distribute, yet wants to avoid raising customer prices, then the utility may not have enough money to pay dividends to shareholders or may have to reduce existing shareholder dividends. I look for utilities who are well diversified and have adjusted to the new deregulated market conditions and use good business practices in getting raw material (such as natural gas), financing expansion or buy-outs of other ‘cheap’ utilities, cost controls (labor costs), etc., etc. In short, I look for utility managers who run the utility like a profit making business, not a government bureaucracy, and have made the commitment to a steady and secure dividend payment to shareholders. Because of the changing climate for utilities, I have reduced my portfolio holding from 15 to 10% over the past year

5. Closed-end bond funds are similar to open-end bond funds, except that once the fund shares are initially sold to the public, the number of shares that make up the closed-end fund will never change. What changes is the value of each share, based on the value of the bonds in the fund as judged by the bond marketplace. This calculated value (the Net Asset Value or NAV) is calculated much like open-end bond funds. However, unlike open-end bond funds, the actual selling price of the fund fluctuates moment-to-moment, based on what the market is willing to pay, much like a stock is valued. When the calculated fund value (NAV) is greater than what the market is currently willing to pay for the fund, then the fund is said to be selling at a discount, which is most often the case. When the NAV is lower than the market price, the closed-end fund is said to be selling at a premium. With an open-end fund, the number of shares available to the public changes on a daily basis…the more shares sold, the more money is in the fund and the higher will be the fund manager’s fee, which is computed as a percentage of the value of the fund. But because the number of shares of a closed-end fund doesn’t change, the fund’s interest earnings will likely not change very much over time, thus the fund manager has little incentive to keep the fund in top form as an open-end bond fund manager would to keep new money coming in and improve his or her fees. Therefore, in my opinion, one must be very careful in selecting a closed-end bond fund. Most of these funds that I have researched are initially very attractive, as they offer what seems to be high income yields compared with their open-end bond fund counterparts. However, a review of the dividend history (using the web sites mentioned above) will often show a gradually declining dividend payment and equally declining share price, until finally the fund drops to around $2 to $4 per share, at which time the fund is rolled into another closed-end bond fund, which then repeats this cycle. Most closed-end bond funds are issued by brokerages or insurance companies, who seem to have little concern in managing these funds for the long term benefits of their income investors, although there do seem to be some exceptions. The easy way to tell is to look at dividend histories over 3, 5 and 8 years. A gradually declining price per share (Net Asset Value) and declining dividend payout is a sure sign that this closed end bond fund is headed to extinction. At the Yahoo finance web site, , go down to ‘Research and Education’ and click on ‘Historical Quotes’. Put in the closed end fund symbol, enter the time period of which you wish to check, check the ‘dividends’ circle and then click on ‘Search’. You will see the complete dividend history. Using Microsoft’s Money Central, as outlined above, will also work for closed-end bond funds. In addition, Morningstar ( does a separate evaluation of closed-end funds, to include all classes of closed-end bond funds. Due to the downward bias of closed-end bond fund dividends, I have reduced my portfolio weighting of these securities from 10 to 15% to 5 to 10%.

6. The final category of income-only investments is a kind of hodgepodge of investments that I will go over individually. However, due to the relative high risk and/or very low trading volume of these securities, I recommend investors hold no more than 5% of their total income investments here.

a. Distressed stocks. These are stocks with a history of paying stable dividends that have, for some reason or reasons, fallen into deep disfavor with investors. The recent best example is Philip Morris. Here is a company awash in cash, high earnings and a historically growing dividend, yet with a cloudy future due to pending litigation. If just one of the outstanding punitive product liability class actions lawsuits is successful through the appeals process, Phillip Morris would most likely have to cut its dividend and ultimately probably have to file for chapter 11 bankruptcy protection, as other suits would most certainly follow. There are many such dividend paying companies who have fallen on such times, that offer very attractive dividend yields but bear considerable risk. This is not a place for the unwary or the casual income investor. Only through careful research of knowing what the risks are and how well the company management will most likely be able to deal with these problems, should an income investor consider buying such high yielding stocks.

b. Royalty Trusts. These are securities that receive usually monthly royalty payments per 'unit’ or share. Natural resource commodities such as oil, gas, minerals and timber are typical of royalty trusts. The dividend paid will depend upon the quantity and the unit price of the commodity that is mined, pumped or harvested. For example, when oil prices are high and the oil field is productive (actively pumping oil from the well), the trust that receives the oil revenues will usually pay a nice, high-yielding dividend. However, when the price per barrel of oil drops and/or the number of barrels pumped per day drops, the dividend will also decline. Dividend payments can vary considerably from month to month, so great care must be taken to ensure the trust has a good chance of maintaining its dividend, such as ensuring the trust has a solid history of dividend payments, there is an adequate supply of the commodity (such as estimated number of million cubic feet of natural gas in a gas well) and that the commodity is one that will be in continued demand. Some examples are LL&E Royalty Trust (symbol, LRT) and Sabine Royalty Trust (symbol SBR).

c. Master Limited Partnerships, or publicly traded limited partnerships, are traded on stock exchanges with their own symbols. The partnerships usually involve a service that the general partners (those actively engaged in the business venture) provide to a company or business for which the partnership is paid. We the ‘silent investor’ or limited partner, buy shares (units) and rely on the general partners to be productive and profitable. If the partnership is profitable, net earnings are distributed to all partners and are taxed, like a REIT, at our level. Typical MLP’s include oil and gas pipelines, transport services, storage services or financing services. There are many MLP’s that have been providing needed services for many years, such as Kaneb Pipe Line Partners (symbol KPP), who have an equally long history of gradually increasing dividends. As with any high dividend paying stocks, it is important to research the company management’s ability to profitably manage the partnership and maintain a steady and reliable dividend stream.

Limited partnerships are also available ‘off-line’ through syndicates or through brokerages, but the marketability of these private partnerships can be quite tenuous and units can be expensive to buy or sell. Indeed, limited partnerships can be bought/sold in land use (such as animal grazing), Broadway plays, movie productions, equipment leasing and so on. Unless you really know the general partners and trust their ability to profitably manage the venture, my universal advise is to stay clear of those limited partnerships not traded on the major stock exchanges. And if you are approached by a stranger attempting to sell you units in a ‘foolproof’ or ‘no-miss’ limited partnership, run, (don’t walk) to the closest exit.

d. Corporate-backed Trust Securities (CorTS) and Corporate Asset-Backed Corporation (CABCo) are the latest generation of what I call ‘bond mutants’. These are essentially corporate bonds that are packaged in a different way to make them more marketable to the average investor, and are available, like all the other securities we have discussed, on the major stock exchanges. The way they work is a major corporation, such as JC Penny or Bell South, will issue, say, $100,000,000 worth of bonds into a trust that a brokerage will then cut up into $25 shares (much like preferred shares, but these shares are actually corporate bonds) that are then given a ticker symbol and sold on the major exchanges. Each share bears a coupon interest rate and the company’s bond credit rating, (just like a bond), but at $25 each (at issue), they are much more affordable to most income investors. For example, through your brokerage account, you can buy 1,000 shares of the JC Penny CABCo for the normal brokerage commission of $10 to $25, depending on which fee schedule applies to your brokerage account. This is far cheaper than the $130 to $160 that 25 bonds would cost in discount brokerage commissions. And just like a bond, interest payments will come into your account semi-annually. But because the shares currently trade below their issue price of $25, the current yield is higher than the bond coupon yield. For example, at $25, the JC Penny CABCo has an annual yield of 7.60% (7.54% after a $25 brokerage commission on a $25,000 investment); that is, it makes an interest payment of $.955 every 6 months, or $1.91 per year. But at today’s price of $13.40 per share, the CABCo share has an annualized current yield of $1.91/$18.40 = 10.38% (10.15% after commission)! Go figure. Clearly, the market either doesn’t know about these securities or the market has a deep dislike for JC Penny’s bonds! For researching, the symbol for Bell South CorTS is KTB and for JC Penny’s CABCo’s it is PFH. If your experience is like mine, be prepared…no one in the investment community will have any idea what you are talking about when you mention a CABCo.

So in a nutshell, that’s it! I hope this brief review has helped you to better understand income-only investing. And if you elect to delve deeper into this topic, I hope you have as much fun as I have.


Bruce C. Miller is a Fee-Only Certified Financial Planner ™ living in Vancouver, Washington.