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Your parents sound like good candidates for pure income investing. A steady, reliable stream of income while basically preserving the investment capital.

The following are how I allocate my income portfolio:

1. Equity REITs. The core. These are income machines...Congress designed them that way, and, thankfully, they are, for the most part working as planned.

2. Preferred stock, or the "common-man's bonds". Buy them on the exchanges and hold until redeemed....just avoid paying a premium to the $25 redemption price and makes sure the issuing company has a history of covering their dividends.

3. MLP's. Most have long histories of consistent and growing distributions (not dividends) ....usually classified as Return of Capital. Great for elderly individuals who carry their units into their estate at death, as basis will 'step up', meaning all distributions collected during their lifetime were tax free. However, annual tax returns from the K-1's are a pain.

4. Utilities. Great consistent dividend payors, providing they are primarily in the business of energy delivery and customer service. Avoid those whose primary income source is power generation.

5. Dividend paying common stocks. Best sectors are energy, pharmaceuticals and finance.

6. Royalty Trusts. Roller coasters...right now, those dealing in oil/gas are paying big, fat dividends and prices have run up considerably...but the prices of most Trust shares are quite volitile, as their price is determined soley on the market price of the commodity they pump or mine. Also a tax headache.

7. Business Development Companies. High dividends, but tough to understand...and almost nothing out there to research. The two biggies are ALD and ACAS.

The following I avoid:

1. Single Premium Immediate Annuities. No residual value.

2. Individual bonds. Tooooo expensive.

3. Mortgage REITs. Very difficult if not impossible to understand. Dividends often cut when short rates rise.

4. Most open end funds. Dividend cuts are usually inevitable. The exception here might be REIT funds...but their yields are usually 150 to 200 bp below the yield of a collection of individual blue chip REITs.

5. Any kind of closed end fund. Dividend cuts are virtually guaranteed.

6. Unlisted REITs. Illiquid. Not subject to market forces....meaning too many conflicts of interest with managers.

7. Private anything

8. Viaticals. Unregulated. A great way to lose money.

Finally, although I subscribe to Matthew Emert's monthly newsletter, "The Income Investor", I don't recommend him. Despite the name, he is not an income investor...he is a gowth-and-income investor. Now, if you don't mind helping your parent's periodically rebalance and sell stocks for gains, then Matt Emert's approach may work for them. But for pure income investors who don't want to try and time the market this way, his typical security yeilds are in the 1 to 3% range...usually not enough income for most.

BruceCM
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