Any loudmouth can give investment recommendations.
But I’m not too interested in what someone tells me I “should” buy…
I want to know what they’re doing with their money.
With that said, let me tell you what I own in my income portfolio … and perhaps more important … what I don’t own.
The Core of My Income Portfolio
I own a ton of dividend-paying stocks. Most are long-term holdings that I’ve owned for years and plan to keep owning for years.
The stock prices rise … the stock prices fall. I don’t care so long as the dividends keep coming and they rise over time.
But this isn’t a “buy, hold and forget” strategy.
I employ risk management through position-sizing in most cases. And I make a point to weed the garden from time to time, getting rid of dividend stocks that are no longer performing and replacing them with new opportunities that offer more promise.
Moving outside of the typical stock realm, I also own a rental house. It’s debatable whether this is an “income” investment at the moment.
I roll all excess cash flow into extra principal payments. My goal is to pay the mortgage off early and enjoy the income stream a few years from now.
I also invest in an assortment of income-oriented options strategies. These are more “trades” than “investments,” as they are short term in nature. But they do produce a steady stream of income.
One Big Thing Is Missing From My Income Portfolio
There is one unlikely piece absent from my income portfolio: bonds.
Let me be clear. I do own bonds — quite a lot of them.
But I don’t consider them a part of my “income portfolio.”
Hear me out.
As long-term income vehicles, bonds are garbage.
Sure, a 3% to 4% yield on a long-dated Treasury is higher than the dividend yield on the vast majority of stocks.
But it’s worth just a little bit less every year due to inflation — these days a lot less.
I want my income stream to grow over time, and I’m not going to get that in bonds. I will get it (or at least expect to) in a good dividend stock portfolio.
What Bonds CAN Do
While bonds might be crappy long-term income investments, they can be fantastic for speculating!
The modified duration on a 30-year bond is somewhere in the ballpark of 20 to 25 years, depending on the coupon rate of the bond.
I’ll spare you the math, but what this means in principle is that every 1% move in market yields can lead to a price swing of 20% to 25%.
It’s been an unusual year, in that stocks and bonds have fallen together. Diversification hasn’t worked all that well.
But in a more normal environment, a plunging stock market is accompanied by plunging bond yields and soaring bond prices.
So my investments in longer-term bonds tend to be for speculation or hedging against a market decline. Any income I collect is just icing on the cake.
As I wrote recently, I’m also a fan of short-term bonds these days. The fattest part of the yield curve is around the one-year mark, where yields top out at about 4.5% as I write.
This is a fantastic place to park idle cash while you’re looking for a long-term home for it.
But again, I hesitate to call it an “income” strategy because our time horizon is a year. I don’t know what yields are going to look like a year from now when today’s 1-Year Treasury matures.
If the last several years are any indication, yields will be a lot lower. I hesitate to depend on a 4.5% yield only to see it drop to 2% or less when I have to reinvest in a year.
I still love short-term Treasurys. If you have cash you don’t plan to invest for the next year, buying short-term Treasurys is a no-brainer.
And if you think we’ll experience a recession … and that longer-term bonds will drop as a result … having some long-term bonds as speculations makes all the sense in the world. Why not enjoy a nice return from a collapse in bond yields?
But for your income portfolio — that corner of your nest egg that generates the income you need to pay your bills — high-quality dividend-paying stocks are your best option.
And I have everything you need to start up — or bolster — your income portfolio now.
We’ve expanded our scope in Green Zone Fortunes, and we now offer an entire income model portfolio. You can see what some of my absolute favorite dividend-paying stocks are and add them to your portfolio right now.
To safe profits,
Charles Sizemore, Co-Editor, Green Zone Fortunes
Charles Sizemore is the co-editor of Green Zone Fortunes and specializes in income and retirement topics. He is also a frequent guest on CNBC, Bloomberg and Fox Business.