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Author: BruceCM Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 8751  
Subject: Re: monthly dividends Date: 10/10/2010 2:00 PM
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I have been investing for reliable income since 98 when I retired. Like you, I kind of stumbled into it, looking for high yield and presuming my initial investment would be safe and perhaps the income stream.

Now, let me go forward 12 years and tell you what I've learned.

1. Income investing for retirees is a good alternative if the retiree understands and accepts the limitations. The good part is you get regular income to replace your paycheck, you don't have to worry about what stocks/bonds/MFs/ETFs you should be selling and what you should be buying to provide the net cash flow you'll need for the next year and net overall expenses are close to zero. The bad part is you've got to do your homework and be able to recognize reliable distributions (which can be more than just dividends and interest), but more importantly, the risk the distribution will be reduced, suspended or eliminated.

2. Hi yield always equals high risk....risk here defined as the chance the company will reduce its distribution. In today's marketplace, anything distributing in excess of 5% of the company/fund's current price, is a high risk of having an unsustainable current yield. Example: NLY currently is paying an annual $2.72 dividend. Although NLY deals only in high-quality mortgages with high loan-to-value ratios....the current rate of existing mortgage refis makes their current distribution unsustainable...hence the 15% or so yield.

3. Leverage is always high risk, as the securiy's distributions is tied to short term rates...which can change quickly.

4. Open end Mutual funds are generally poor income securities

5. With few exceptions, closed end income funds are terrible income securities. These are typically greed buckets that the 'managers' gradually injest with fees, fees and more fees....all at your expense.

5. Distribution growth is more important than the current yield, although both are important to meeting the retirees income needs.

6. A flat dividend over several quarters, except for fixed income securities liek preferred stock, is a warning sign

7. Limit preferred stock as a % of income. Although traditionally their yield is very attractive....the company redeems them at exactly the worst point for you, the investor, meaning you have to redeploy, after capital gains taxes, the redeemed amount into other income securities, whose yield will always be lower, hence you'll take an income cut.

Dividend ETFs are getting more of my attention and income investment dollars....largely because the ETF does the stock screening and selection for me.

I have about 50 income securities, nost are individual stocks/REITs, with a smattering of preferred stock, exchange traded bonds and a few MLPs.

BruceM
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