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Income Investment Ideas; Useful even for the growth investor. April 15, 2009

Posted by shaferfinancial in Finance.
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Once you get away from the idea of total diversification and the use of indexed or mutual funds one can start to think in very different terms about their investments.  One of those old and conservative ideas that has stood the test of time is every portfolio needs to be investing in income producing products.  Ben Graham, writing in the early 1970s spent much time talking about bonds as an alternative to equities, but since then there have been other possibilities opened up.  Real Estate Investment Trusts, Limited Partnerships, Master Limited Partnerships, and Preferred Stock as well as traditional bonds can be invested in to produce income.  Each of these come with their particular risk level dependent upon what it is that is backing the interest or dividend payout.  But like Ben Graham has instructed us risk is relative to the underlying company so the bonds of one company paying 4 1/2% can be more risky than equities of another that has been beaten down in price but has good underlying fundamentals.  Graham suggests that a 50% income producing products with 50% equities is a good starting point.  He further suggests that at times you might go as low as 25% equities when they are expensive or as high as 75% when they are cheap, like now.

I recently purchased a small amount of a income producing master limited parnership (MMP) to add to my income producing side because I am below that 25% level.  At my purchase price the current dividend payout is over 9%.  This adds on to my ownership of HCN which at my purchase price is now paying a dividend of 12%.  At current prices is has a dividend of over 8.5%.  Now I tell you this not to get folks to follow my particular investment advice, but to demonstrate to people what one could do if they were to think beyond bonds for their income producing investments.  There is nothing wrong with bonds, even government bonds which are the only investment I would consider safe, but I am reaching for better yield with what I consider lower risk.

Now I made a mistake a couple of years ago and didn’t follow Graham’s rules and invested mainly in equities.  Had I followed his rules and had a much higher amount of income producing investments when stocks were relatively expensive, I would be much better off now with income coming in.  Note: to take the income or to reinvest it is a decisions that can be changed as your needs change.

The more I learn about investing, the more I talk to people about their finances, the more I work with people to improve their financial lives, the more I realize that the old ideas that have stood the test of time, ideas communicated by folks like Benjamin Graham and Warren Buffett, are the ones that should guide us.

As your wealth accumulates over time you should increase the amount [not necessarily the percentage] of income producing products.  Eventually you will accumulate enough so that if you don’t reinvest the dividends or interest you can live off of the proceedings.  It should be the primary goal to get to that point as soon as possible.

******Note, one should never invest in companies based on what any blogger, financial advisor, relative, friend, etc. tells you is a good investment.  Always do your own research, come to your own conclusions.  Shafer Financial does not have a license to dispense specific investment advice, therefore anything he posts should not be acted on without doing one’s own due diligence.  This blog is for amusement purposes only.************



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