5 Crucial Things Every Income Investor Needs to Know

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We're just past the edge. The "tipping point" is here.

Don't worry, it's not dangerous. In fact, if you're an income investor, then this might be the start of a very prosperous trend.

Between 2012 and 2030, roughly 10,000 Americans will turn 65 every day. You might be among them. This marks a major shift that will play out for millions of people in the next years and decades. And I think it could lead to a surge in popularity for income investing.


In fact, my colleague Amy Calistri outlined the case in a past article...

"Think about it. Some estimates have this group [baby boomers] controlling more than 80% of personal financial assets -- that's trillions of dollars. Much of that is tied up in housing and other non-liquidinvestments , but there are still loads of cash in traditional spots. According to theInvestment Company Institute, there is $10.7 trillion inmutual funds alone.

As baby boomers wind down their working years, they're going to do what retirees before them have done -- shift from riskier stocks and commodities into more buttoned-down income investments. In fact, given the rockymarket in the past decade and disappearing pensions, the shift could be larger than most people think."

This could lead to a golden age for income investing. But as attractive an opportunity as this may be, there is noguarantee the graying of the baby boomers will simply lead to a massivebull market across all income securities. That's why it's still very important to select high-quality income investments -- ones that pay a sizeable, risingdividend , and carry a degree of safety so you can rest easy owning them. If you do this, then any broad bull market will simply be icing on the cake. 

Icall these kinds of investments Retirement Savings Stocks

To help you find the best high-yield plays -- and maximize your returns -- I've rounded up some of my favorite income investing tips. I use these tips personally to help guide my portfolio choices in High-Yield Investing . No matter your experience level, they should give you an edge in finding the best Retirement Savings Stocks on the market. And if we see the big shift into income securities in the years and decades ahead, then all the better.

Tip No. 1 : Look off the beaten path 

Always remember thatyield is a combination of dividends paid and share price. If prices rise, the yield on a security falls, all else being equal.

So what will happen to many popular high-yield securities if millions of retirees start buying them in search of solid income? Their prices would likely rise, pushing yields down.

That's why it's valuable to look off the beaten path for higher yields. You have to look into the special classes of securities built for income investors. Many of the securities I recommend in High-Yield Investing are nowhere near household names. And that's OK. My years of researching the income field have uncovered the rarest, most lucrative income assets, including securities such as business development companies, stapled products, master limited partnerships and even exchange-tradedbonds . This is where you'll uncover truly mouth-watering yields the majority of investors who are focused on common stocks tend to overlook.

Tip No. 2 : Dividend safety is key 

For income investors, nothing should be held in higher esteem than the safety of dividends. After all, what's the use of a high dividend if it's only going to be cut a few weeks later?

But an amazing thing happens when you follow my first tip and look off the beaten path for income investments.

Common stocks are under noobligation to pay a dividend; management can cut their payments at any time they please. But I've found a few securities -- such as preferred stocks -- that can't change or reduce their payments. A number of other little-known securities have the same restrictions, all but guaranteeing you'll be paid a stream of income you can count on.

Tip No. 3: Use market downturns to find higher yields 

Most investors look at a market downturn as a bad thing, and in fact, I would rather the market rise than fall. But I also appreciate the opportunities that appear in a downturn.

As I said, a stock's yield is a function of its price. If a stock pays $1 per share and trades at $20, its yield is 5%. If the same stock dips to $10 per share, the yield has risen to 10%.

That's one reason why I buy heavily during market downturns -- the yields become too high to ignore! If you can stomach volatility during abear market , then you'll likely have a chance to lock in unnaturally high yields.

Tip No. 4: Don't be afraid to take a loss 

High-Yield Investing subscribers always ask me when to sell their holdings. And for good reason -- when you sell is just as important as when you buy.

I'm personally never afraid to take a loss. Many investors continue holding losing stocks and hope for a rebound, only to watch them sink further. I've seen this countless times. That's why I'm always sure to look at the reasons a holding is falling and if I should sell.

If the stock in general is falling with the market, then I may not be worried. However, if changes in the company's operationsmean it could see rocky times ahead, then I don't want a part of it.

Tip No. 5 :Taxes matter 

When is a lower yield more attractive than a higher yield that's just as safe? When the lower yield is taxed at a lower rate.

Consider this: An investor in the top federaltax bracket is invested in amunicipal bond that pays 6%. Because the income from thisbond is tax-free, the taxable-equivalent yield is actually 9.2%! In other words, if the same investment were in a fully taxable security, then our investor would have to earn 9.2% to have the same income after taxes.

It doesn't take long for that difference to add up to serious cash.

Action to Take --> If you understand and follow these tips, then you'll be well on your way to a healthy portfolio full of Retirement Savings Stocks . Remember, it's up to you to take charge of your retirement. Ideally, you don't want to wait until you're already retirement-age to do it, either (although it's never too late). I'd tell any 20-something that they need to begin thinking about their retirement right now . It gets too easy to let work, marriage, kids, and a host of other things get in the way.

Don't get me wrong, all of those things are important. But so is your livlihood during your golden years. And if you want to continue providing for your family, paying your medical bills, for your housing, for food on the table... not to mention those "luxuries" we all dream of... then you can't afford to play catch-up. And you certainly can't depend solely on your401k or yourSocial Security check from Uncle Sam, either. That's why Retirement Savings Stocks are the single best way I know of to fund a retirement.


-- Carla Pasternak

Carla Pasternak does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.


This article appears in: Investing , Investing Ideas

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Carla Pasternak

Carla Pasternak

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