Income investing – a basic portfolio of stocks, REITs and bonds



My father passed away in 2004, at the age of 70.  He was fairly frugal and had his investments set up to last for some time, so I inherited part of his IRA account (he had taken his pension/401K and gotten it put it into an IRA when he retired).

For those of you who have not had an “inherited IRA” – when you receive it, the IRS has you calculate your remaining years of life, based on your current age. At that time, the IRS tables said I could expect to live another 41.6 years, and so I had to pull out  1/41.6th of it. Each year, the number drops by 1, so the following year, I had to pull out 1/40.6th of it…..

I kept in with the same investment advisor for about a decade, and it grew as I was only taking out the minimum required. However,  in tracking I found they were always about -1.5% less than what I could have gotten from a regular diversified portfolio that I could set up. I made the decision in 2015 to take it away from them and invest it myself.

As one gets older, one starts to look at how to move from “saving for retirement” to spending your retirement money – and making sure it lasts for the remaining years. The traditional way that has been done is to setup your investments to generate income – through bonds and stock dividends. In the past, you could build quite an income portfolio with a mix of 6-7% bonds and 5-7% dividend stocks.

The issue has been that, with the low interest rates in place for the last several years, bonds have been returning very poorly (1% – 4%) and companies have not been paying dividends (the S&P 500 has been paying out about 2.2% dividends for the last year or two). What is a guy to do?

I picked up an interesting book, titled Yes, you can be a successful Income Investor by Ben Stein (Yes, that Ben Stein) and Phil DeMuth. The book was written  in 2005 (after the bust, but before the 2008 crash) but the concepts still hold up. They list a variety of income-yielding securities and then tell you how to combine them in a portfolio where you can get maximum yield for minimum risk. The concepts are followed in numerous articles on the web and in finance magazines as well.

The book covers three areas

  • Bonds (IOU’s from companies, you are loaning them money). They pay you back a set amount each year, and then the loan amount when the loan is due
  • Dividend paying stocks: Companies take a portion of the revenues and pay them out to shareholders on an annual basis. Depending on what price you purchased them at, this ‘yield’ can be somewhat high. This is in addition to any growth in share price of the stock
  • REITs (Real Estate Investment Trusts): Real estate companies that are created as trusts have special tax rules, but they must pass on a significant amount (90%) of their profits in dividends. This makes them good income producing stocks, but they can be risky (see 2007 real estate bust)

They end by providing sample portfolios with actual companies or mutual fund recommendations.  Some of the approaches are very easy (Just 4 mutual funds) and some are somewhat involved (3 mutual funds, 10 stocks, 20 REITs). Overall, it’s a good read, and provides an excellent basis for building your income portfolio.

For my portfolio, in an attempt to keep it simple, I chose to go with 2 bond mutual funds, 4 REITs, and 4 dividend paying stocks. I tried to stick to the book’s proposed 50% bonds, 25% REITs and 25% stocks. My plan was not to reinvest dividends, but to use them to rebalance the account, and to pull out at the beginning of each year when I had to take a required distribution (I am up to 1/29.6th).

For the bond fund, I chose to go with two vanguard low-cost index fund, one that represents the entire bond market (VBTLX) and one that represents intermediate bonds (i.e. 7-10 years) and it’s symbol is VBILX.

For the stocks, I looked at the Dow Jones and S&P 500 for high dividend stocks. I chose Verizon, Caterpillar and Chevron, as they were paying high dividends at the time. I also chose to invest in an ETF fund, in this case the iShares account for preferred dividend stocks, symbol “PFF”.

For the REITs, I started with the list provided by the Stein & DeMuth book, and whittled it down, based on yield, P/E ratio and general company health.

In 2016, they did well, with a dividend return of 3.7%, and capital gains of 6.9% (total of 10.6%). The stocks and REITs did very well, but the bonds pretty much stayed level. Not bad for a portfolio with 50% bonds.

For 2017, I traded out the Caterpillar (it had grown over 50% and my calculations showed there wasn’t much upside versus my new pick, Cisco). Other than that, I let everything ride.

So for early 2017, here is where I was.

% Symbol Name Current Shares Current Price  Current Value Yield Type Dividend
23.4% VBTLX Vanguard Total Bond Index 2814.3 $10.65 $29,972 1.80% Bond $552.47
26.9% VBILX Vanguard Int-term Bond index 3058.1 $11.24 $34,373 2.10% Bond $606.09
5.9% HR Healthcare Realty Trust 250.0 $30.33 $7,583 4.10% REIT $300.00
7.4% HPT Hospitality Properties Trust 300.0 $31.75 $9,525 8.40% REIT $609.00
4.5% O Realty Income Corp 100.0 $57.50 $5,750 2.80% REIT $249.96
7.1% UMH UMH Properties Inc 600.0 $15.04 $9,024 7.70% REIT $540.00
3.5% CSCO Cisco 150.0 $30.24 $4,535 3.72% Stock $168.72
4.6% CVX Chevron Corp 50.0 $117.77 $5,889 5.10% Stock $214.50
12.5% PFF Ishares Preferred 430.0 $37.22 $16,005 5.70% Stock $980.12
4.2% VZ Verizon 100.0 $53.39 $5,339 4.50% Stock $227.25
$127,994 3.48% $4,448.11


The overall yield provided is scheduled to be about 3.48%. Nowhere near the yields it used to be, but it gives you some idea of what you could expect this portfolio to ‘throw off’ in the years ahead. Note that this does not include company growth for the stocks and REITs, so you can hope (?) that this keeps pace with inflation.

I’ll report back periodically on how this portfolio is doing.



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