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Advice Needed: Security Selection for a Couple on SSI


Ross812
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I am not a financial planner or RIA, I only manage money for family members. One of my inlaws recently had a stroke and is not capable of managing their money. He has a Scottrade account and was a daytrader who managed to lag the market the last few years but hasn't lost any money. His wife met with a financial planner who was more than willing to stick them in some low cost bond funds for a nice commission. The inlaw asked me to look over the accounts and put them in income producing assets that need minimal management. The couple wants to be able to cash a check every quarter for $5000 to supplement their SSI and small pension. The couple's SSI+Pension income is ~40k. They have no debt.

 

I have never worked with someone who is aiming for capital preservation and income. My general answer to people who are in 15+ years out and have no inclination to learn how to invest their own money is to buy a low cost index fund and those closer to retirement to start blending in bond funds. Six years ago I would have put my inlaws nest egg (500k) into AAA bonds, Government bonds, and an online money market paying >5%. The extra 25-30k in income without touching the premium in addition to their SSI and pension would have made for a nice retirement. Today, money markets are paying <1% and bonds are yielding next to nothing, which leaves dividend paying stocks, mutual funds, and CEFs as potential candidates.

 

Do you all have any advice on any longterm securities paying a decent yield without going too far down the quality curve? What about allocation between bonds and equities considering the environment we are in right now?

 

So far I'm considering

equity: KMI, MKC, PEP, IBM, BP, CHRW, LRE.L, CHRW, BAH, KO, WMT;

Bond fund/etf: DODIX, FOCIX, BOND, HYS;

Closed end fund: INF, PCEF

 

My goal is a 4% yield with long term capital preservation.   

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REITs seem like a much better yield/inflation-protected capital preservation option than large-cap stocks or bonds right now.

 

IYR - reit index

 

Also I wouldn't put someone that dependent upon income in a stock portfolio that concentrated. 

 

is this a taxable account?  If so you need a pre-tax check of maybe 7k/quarter...

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I am not a financial planner or RIA, I only manage money for family members. One of my inlaws recently had a stroke and is not capable of managing their money. He has a Scottrade account and was a daytrader who managed to lag the market the last few years but hasn't lost any money. His wife met with a financial planner who was more than willing to stick them in some low cost bond funds for a nice commission. The inlaw asked me to look over the accounts and put them in income producing assets that need minimal management. The couple wants to be able to cash a check every quarter for $5000 to supplement their SSI and small pension. The couple's SSI+Pension income is ~40k. They have no debt.

 

I have never worked with someone who is aiming for capital preservation and income. My general answer to people who are in 15+ years out and have no inclination to learn how to invest their own money is to buy a low cost index fund and those closer to retirement to start blending in bond funds. Six years ago I would have put my inlaws nest egg (500k) into AAA bonds, Government bonds, and an online money market paying >5%. The extra 25-30k in income without touching the premium in addition to their SSI and pension would have made for a nice retirement. Today, money markets are paying <1% and bonds are yielding next to nothing, which leaves dividend paying stocks, mutual funds, and CEFs as potential candidates.

 

Do you all have any advice on any longterm securities paying a decent yield without going too far down the quality curve? What about allocation between bonds and equities considering the environment we are in right now?

 

So far I'm considering

equity: KMI, MKC, PEP, IBM, BP, CHRW, LRE.L, CHRW, BAH, KO, WMT;

Bond fund/etf: DODIX, FOCIX, BOND, HYS;

Closed end fund: INF, PCEF

 

My goal is a 4% yield with long term capital preservation. 

 

 

I would call that list of stocks at least moderate maintenance.  Buying SPY and taking out what is now 4% annually for 15 years would seem to be most appropriate to me.  You could take 20% away from the SPY and buy some Asian ETF to get a little more growth, but that would be a close to zero maintenance situation, taking out less than the long term growth rate of the averages thaty would likely cover almost all worst case scenarios over 15 years.

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You may want to look for something like what is described in getting income from an asset discussion:

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/developing-an-income-stream-from-an-asset/

 

This provides a way to income from cap appreciation types of assets.  It appears to develop a nice income stream with capital growth.

 

Packer

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I do this type of client portfolio all the time.

 

Individual corporate bonds can be a real help -  The SHLD bond maturing in 2018 that Berkowitz owns is secured by inventory and yields around 9.8% right now.  We own a bunch of Radiation Therapy bonds maturing in 2017 that were purchased with yields of 17-19%, currently yielding around 12%.

 

I would probably buy ATAX on this morning's drop for a client like that.

 

We've owned EMES in these types of accounts, still yields 8.7% but used to be a much better value.

 

Lots of KMR ~7.4% yield at current price.  KMI like you said is also a good initial yield and dividend grower.

 

BP, Royal Dutch Shell and Lukoil for the high yielding oil portion.

 

TWO harbors below book value for a small portion, maybe a small amount of PSEC.

 

The key is to be very diversified and add opportunistically to the most attractive income securities as they become available.

 

I would put JPM in an income account at todays price as well.

 

In Canada, small positions in the energy income plays and Glacier media, just not too much in any one name.

 

For emerging markets there are many dividend weighted WisdomTree ETFs - DEM is a high yielder with the underlying index yielding something like 5%.

 

There are also some high quality pref. shares worth looking at.

 

DSL pays monthly and might be worth a look on a drop - keep an eye on the NAV discount and try to add on extremes.

 

 

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I run a portfolio for my father in law with a similar set of goals. A diversified set of well selected income securities is how I've chosen to go about it, outside of ETFs as mentioned above. I pick individual issues, and leave them alone.

 

A couple of choices include TY.P, a pref on a closed end fund. Coverage here is massive, and it trades a 12.5% discount to face value. Current yield is 5.7%. Interest rate risk due to perpetual nature, but if it meets the portfolio goals and you have a long time horizon, it might work.

 

Other choices include UMH.PR.A and ELS.PR.C, both prefs from mobile home park REITs.

 

I also have a number of Canadian income securities in this portfolio, things like INN.DB.G and PMT.DB.E, things where I think the coverage is good and the 7% YTM is attractive.

 

As mentioned above, small positions in higher risk income securities isn't unreasonable, if they're uncorrelated and you like the underlying. I have a small SSRAP position in this portfolio, if you like SHLD. Another position I have in small size is EE.DB in Toronto. 35% yield to maturity, 50% discount to face value. It's a small E&P where the senior lender is looking to reduce exposure, and the debt is nearly due. However, their recent production not yet publicly reported (except through the Alberta gov't system) is decent, and they have reasonable asset/income coverage. I think its highly likely to work out. I own this one myself also (much larger position than in my Father in laws account) as I really like the risk reward here.

 

 

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Global has got you covered, imop.  I was also going to throw out SOR for something to look at, if the discount gets out of whack.  It's a closed end fund (the one buffett and munger bought back when they got into a little trouble with the SEC). It is run by first pacific.  They distribute ~4% of the current market price per annum, so they kind of take care of managing the distributions for you.  They have a pretty good longer term track record.  Also there are some munibond CEFs with pretty gigantic discounts and yields out there.

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I am not a financial planner or RIA, I only manage money for family members. One of my inlaws recently had a stroke and is not capable of managing their money. He has a Scottrade account and was a daytrader who managed to lag the market the last few years but hasn't lost any money. His wife met with a financial planner who was more than willing to stick them in some low cost bond funds for a nice commission. The inlaw asked me to look over the accounts and put them in income producing assets that need minimal management. The couple wants to be able to cash a check every quarter for $5000 to supplement their SSI and small pension. The couple's SSI+Pension income is ~40k. They have no debt.

 

I have never worked with someone who is aiming for capital preservation and income. My general answer to people who are in 15+ years out and have no inclination to learn how to invest their own money is to buy a low cost index fund and those closer to retirement to start blending in bond funds. Six years ago I would have put my inlaws nest egg (500k) into AAA bonds, Government bonds, and an online money market paying >5%. The extra 25-30k in income without touching the premium in addition to their SSI and pension would have made for a nice retirement. Today, money markets are paying <1% and bonds are yielding next to nothing, which leaves dividend paying stocks, mutual funds, and CEFs as potential candidates.

 

Do you all have any advice on any longterm securities paying a decent yield without going too far down the quality curve? What about allocation between bonds and equities considering the environment we are in right now?

 

So far I'm considering

equity: KMI, MKC, PEP, IBM, BP, CHRW, LRE.L, CHRW, BAH, KO, WMT;

Bond fund/etf: DODIX, FOCIX, BOND, HYS;

Closed end fund: INF, PCEF

 

My goal is a 4% yield with long term capital preservation. 

 

Capital preservation should be the main goal for this retired couple.  That means cash that could be available for picking up some high quality, income producing assets at bargain prices if the market sells off.  At least wait another six months to see what happens. 

 

However, if you are determined to have them fully invested in equities, you might put them 25% in LRE, 10% in Admiral Group because they are great businesses that return almost all their earnings to shareholders.  Then , put most of the remainder into high quality Utilities that pay good dividends.

 

Keep at least 10% in cash for emergencies.

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I think there are two possibilities here, depending on your confidence and the amount of time you have to put into this. You could probably build a reasonable quality portfolio using cheap ETFs, rebalance once a year, and do nothing else.

 

The alternative choice is to replace ETFs with individual securities. This requires much more work, as you'll have to monitor the securities, but offers them the potential for a greater return. I do a mixture for my father-in-law, where the base of the portfolio is ETFs, and I replace with individual securities when I believe there is better value.

 

For example, I sold some of his REIT ETF and bought pure industrial reit aar.un on Toronto. I think its better value than the REIT index, and especially like the long duration of their leases and mortgages. Article below has a more detailed look.

 

http://seekingalpha.com/article/1746802-pure-industrial-reit-safety-at-7-percent-yield

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Thank you for all the advice!

 

So far:

 

CEFs:

 

INF - 7.3% - Brookfield managed global infrastructure  [4%]

PFL - 9.4% - Pimco managed diversified bond              [3%]

ETW - 10% - Eaton managed buy/write                      [4%]

 

Funds:

FOCIX - 3.5% - Fairholm managed bonds        [8%]

DODIX- 3% - Dodge manage bonds                [5%]

OAKBX - .5% - Oakmark defensive                [8%]

YACKX - .9% - Yacktman defensive                [9%]

DEM - 4% - WisdomTree EM                          [2%]

MOAT - .8% - Widemoat ETF                        [8%]

 

REITs:

PSEC - 12%    [1%]

TWO - 10%    [1%]

NLY - 11%      [1%]

VNQ - 4.3%    [3%]

DRM.TO - 0%  [1%]

PDRTF - 7%    [1%]

 

Equities:

BP - 4.8%    [3%]

LRE.L - 9%  [6%]

ADM.L - 9%  [3%]

KMI - 4.6%  [5%]

KMR - 7%    [5%]

JPM - 2.7%    [2%]

MKC - 2.1%    [2%]

PETM - 1.2%  [2%]

CHRW - 2.4%  [2%]

BDVSY - 3.5%  [2%]

NSRGY - 3.6%  [3%]

IBM - 2.1%      [2%]

INTC - 3.6%      [2%]

AAPL - 2.2%      [2%]

 

This portfolio gives a yield of 4.24%

 

It is composed of:

 

REIT - 8%

Equity - 54%

Utility - 14%

Bond - 20%

Buy/Write - 4%

 

Any glaring holes? Am I being too aggressive in the allocation?

 

 

 

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It seems a little complicated. I don't see the point of positions less than 3%. I would guess most retirees would prefer 10-15 holdings instead of 29, easier to keep track of what you own and what role each one plays.

 

I think it could use more foreign exposure. DEM is a good choice.

 

TDIV would cover IBM, INTC and AAPL pretty well.

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Thank you for all the advice!

 

So far:

 

CEFs:

 

INF - 7.3% - Brookfield managed global infrastructure  [4%]

PFL - 9.4% - Pimco managed diversified bond              [3%]

ETW - 10% - Eaton managed buy/write                      [4%]

 

Funds:

FOCIX - 3.5% - Fairholm managed bonds        [8%]

DODIX- 3% - Dodge manage bonds                [5%]

OAKBX - .5% - Oakmark defensive                [8%]

YACKX - .9% - Yacktman defensive                [9%]

DEM - 4% - WisdomTree EM                          [2%]

MOAT - .8% - Widemoat ETF                        [8%]

 

REITs:

PSEC - 12%    [1%]

TWO - 10%    [1%]

NLY - 11%      [1%]

VNQ - 4.3%    [3%]

DRM.TO - 0%  [1%]

PDRTF - 7%    [1%]

 

Equities:

BP - 4.8%    [3%]

LRE.L - 9%  [6%]

ADM.L - 9%  [3%]

KMI - 4.6%  [5%]

KMR - 7%    [5%]

JPM - 2.7%    [2%]

MKC - 2.1%    [2%]

PETM - 1.2%  [2%]

CHRW - 2.4%  [2%]

BDVSY - 3.5%  [2%]

NSRGY - 3.6%  [3%]

IBM - 2.1%      [2%]

INTC - 3.6%      [2%]

AAPL - 2.2%      [2%]

 

This portfolio gives a yield of 4.24%

 

It is composed of:

 

REIT - 8%

Equity - 54%

Utility - 14%

Bond - 20%

Buy/Write - 4%

 

Any glaring holes? Am I being too aggressive in the allocation?

 

I like it.  You're doing a good service.  I don't think it is too aggressive given that you'll monitor the portfolio and are conscientious.  Plus, cash and bonds rates can stay low for a long, long time -- rehash Japan, et al.

 

Don't forget about the uncallable preferreds from WFC and BAC... WFC-L and BAC-L.  They give a nice goose to the bonds / cash given that they're yielding over 6%.

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