On average, they're yielding 8%. That's more than three times
theyield of the S&P 500. Try getting that amount from amoney
market orsavings account .
But that's not the half of it. In tandem with those high yields,
the capital gains have been great too. The average total return for
these forty securities is 28.4%. The best performer has gained
209.1%, yet still yields more than 4.5%.
This isn't the performance of some secretindex or an exclusive
hedge-fund's holdings. It's what is currently happening within the
portfolios of my
What's the secret to that sort of performance? How can you build
a similar portfolio for yourself? Don't get me wrong -- I do an
enormous amount of research and watch my holdings and the market
like a hawk. But much of the good fortune comes from sticking to a
few simple rules that you can use as well.
Over the years, these rules have proven their value inbull and
bear markets. The techniques are not complicated. Anyone can follow
them and potentially get the same results. So I wanted to share
with you, my fellow income investors, the four basic rules I follow
to build my winning
portfolios. I'm confident these tips can work for you as well:
Look for high yields off the beaten path
To find exceptional returns and yields, I frequently venture
off the beaten path. Some of the best yields I've found have
come fromasset classes few investors know about. A case in
point is Canadian REITs. These REITs delivered exceptional
yields this year (some as high as 12%), but many stateside
investors have never heard of them.
Other lesser-known securities I look at are
exchange-tradedbonds , master limited partnerships and income
deposit securities. All of these usually yield more than
typical common stocks. In addition, they can also be less
volatile and hold up better during market downturns.
If you're not familiar with these securities don't fret. I
have -- andwill continue to -- cover them within
Consider alternatives to common stocks
It is a well-known fact that the vast majority of common
stocks simply don't yield much. The S&P 500's average
yield is only 2%.
So when I can't find the income I want from common stocks
I like, I look elsewhere. My first stop is oftenpreferred
shares of the same company, which almost always yield more.
Say you wanted to invest in
General Electric (
The commonshares of General Electric currently yield close to
4%, but you can find preferred shares of GE yielding upward
of 6.5%. You still benefit from the underlying company's
backing, but with a much higher yield.
Similarly, many companiesoffer exchange-traded bonds.
While you don't get actual ownership of the business as you
would withcommon stock , you will earn a much higher yield
and have yourprincipal backed by the underlying company.
Look for securities trading belowpar value
Some of my highest returns have come from buying bonds when
they trade below par value. Par value is simply theface value
assigned to a stock orbond on the date it was issued. Most
exchange-traded bonds (which you can buy just like a share of
stock) have a par value of $25 pernote .
But sometimes -- for instance, during a market panic --
investors indiscriminately dump these bonds, pushing their
prices down. By purchasing the bonds at a discount topar ,
you lock in great opportunities for capital gains in addition
to higher-than-normal yields.
A case in point was Delphi Financial Group 8% SeniorNotes
(which have since been called). I purchased the notes in July
2009 for $19.27 -- a 23% discount to par value. During the 16
months I held, I collected $3 per note in interest payments
while the shares rose to their $25 par value. In total, the
notes returned more than 45%.
Sell when it's time
This rule may seem the most obvious, but it is also the most
difficult to follow.
Like everyone else, I hate to admit I was wrong about
aninvestment . But I find it even harder to watch losses
mount as a pick falls further. That's why I'm not afraid to
take a loss. I swallowed my pride and closed out several
positions for losses during the lastbear market , and I'm
glad I did. Continuing to hold these would have greatly
reduced returns on my portfolio.
Action to Take --> I
t may sound like a cliche, but knowing when to sell is just as
important as knowing when to buy. A wise investor knows when to cut
losses and move on to the next opportunity. If the security in
question is falling with the market, I may not be worried. However,
if changes in the company's operationsmean it could see rocky times
ahead, then I don't want any part of it.