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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 8891  
Subject: Re: My DG Portfolio - Work in Progress Date: 2/21/2013 1:59 PM
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psamtani

This is my 13th year of investing for reliable income in retirement. I've learned a good deal along the way, so if you don't mind my prescriptive insertions.... :-)

First thing you really should do is set your income investing goals. For some, this seems obvious, but in reality it isn't at all obvious. Your goals are based on income need AND on portfolio need in the years ahead. Your goals should cover the following topics: reliability, growth, portfolio stability, portfolio growth and liquidity.

1. How important is dividend reliablility (low risk of cuts or reductions)? This is the most important to those averse to income risk and those with high fixed expenses in retirement without other sources of income. Laddered Investment grade bonds, only the highest quality stocks (such as regulated utilities and investment grade preferreds), life annuities, laddered CDs...these will make up most of the porfolio.

2. Income growth? This is most important to those who retire young and whose other sources of retirement income are fixed for life. Investments will have to lean towards dividend corporations with growing revenues in growing industries, but will GENERALLY involve greater income reliability risk.

3. Portfolio value sustainability. For most, this is probably mostly psychological, as the assumption of saving for retirement is that during retirement you will 'decumulate' or draw down your savings over retirement years...which looks great on paper but is not human nature. Accumulating during working years doesn't suddenly stop at age 62 and reverse itself. Now, there is absolutely nothing wrong with decumulating, and the 'standard' portfolio draw-down of modern portfolio theory using the studies of Bengen and others is pretty much the norm out there. So to have sustained portfolio value as a goal really should require that you have a reason for it...such as using your portfolio to pay late-life high expenses, such as a nursing home...or perhaps providing support for a disabled family member in your late years, etc. Income investments consistent with this will be those that do not involve distributions of your portfolio back to you, such as life annuities or certain mutual funds. However, this will not be an issue with most income securities.

4. Portfolio growth. This will likely be important to those whose late life or estate need is for high valuation. If this is a goal, you probably need to stick with total return investing, as you will need to monitor and buy/sell based on security valuation. And you'd avoid all fixed income and slow growth investments.

5. Liquidity. How important is the ability to convert investments in to cash quickly and at little cost or risk of loss of principal? A need for high liquidity necessitates sticking with broadly traded securities and avoiding most fixed income.

My other recommendation is to manage income risk by limiting exposure to any single security and to income groups. For me, this is no more than 3% of my income from any single stock/bond/REIT/MLP and no more than 20% of my portfolio income from any single income group, where an "income group" are a collection of securities that generate revenue from the same market. Examples are consumer non-cyclicals, utilities (regulated), equity retail REITs, health services equity REITs, preferred stock (I group these due to their rules of dividend suspension), midstream MLPs, pharma, pure financials and so on. But note that my % calcs are based on portfolio income, NOT portfolio valuation, as I do not have portfolio valuation as an income goal, although others might.

Finally, you don't mention it, but monitoring your income securities is critical to be able to recognize and throw out income securities that are no longer meeting your minimum income requirements. Income requirements could be a minimum expected annual dividend growth rate, minimum free cash flow coverage, minimum revenue growth for the year, and so on.

I have other thoughts, but this post is getting a bit long..... :-)

BruceM
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