Income investment strategy

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Topic Author
PNWpilot
Posts: 223
Joined: Fri Sep 17, 2021 12:48 pm

Income investment strategy

Post by PNWpilot »

Hi all,

I’d like some advice on how to best invest some money we have saved. My wife and I have approximately $150k that I would like to invest in an income-focused manner. This money is separate from our retirement savings and emergency fund, the latter of which contains 6-months worth of expenses. We have no debt, no kids, and currently do not own a home. Our lifestyles are such that purchasing a home does not make sense right now. Home ownership might be in the cards 5-10 years from now. Until then, we’ll keep working, saving, and investing.

Question: What would a target yield be on an income portfolio? I’ve seen examples on the internet of income portfolios yielding between 6-10%, but I really don’t know much about this area of investing.

My family has purchased many rental properties over the years and has been able to generate a nice monthly income with these purchases. I’d like to avoid the rental route as home values are sky-high, tenants can be a pain, and homes always need repairs. Plus, I don’t want to take on any debt as we’ve both worked hard enough to be debt-free.

Is there a possibility of creating an income portfolio of stocks, bonds, REITs, etc that would be able to generate steady yield with that amount of money? Or would the yield be so small that it wouldn’t make sense to risk our capital? I’m genuinely asking. We have a financial advisor who I am planning on meeting with, but I want more opinions on this as well.

Preservation of capital would be important as this money will likely be used in the future, along with additional savings, to purchase a home. However, as mentioned earlier, home ownership is not an immediate goal of ours.

Thanks,
PNWpilot
KlangFool
Posts: 31426
Joined: Sat Oct 11, 2008 12:35 pm

Re: Income investment strategy

Post by KlangFool »

PNWpilot wrote: Fri Sep 17, 2021 3:09 pm Hi all,

I’d like some advice on how to best invest some money we have saved. My wife and I have approximately $150k that I would like to invest in an income-focused manner.
PNWpilot,

How does this makes any sense unless you enjoy paying a lot more taxes?

You have two choices:

150K -> pay out 5% -> $7,500

A) Pay out the $7,500 as ordinary income and you pay 20+% taxes for the $7,500 income

B) Pay out the $7,500 as capital gain and you pay 0% long term capital gain.

What would you choose? (A) or (B)?

KlangFool
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Mike Scott
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Re: Income investment strategy

Post by Mike Scott »

Welcome to Bogleheads!
What you are asking (safe and 6-10% return) does not exist at this point in time.
Topic Author
PNWpilot
Posts: 223
Joined: Fri Sep 17, 2021 12:48 pm

Re: Income investment strategy

Post by PNWpilot »

Mike Scott wrote: Fri Sep 17, 2021 3:49 pm Welcome to Bogleheads!
What you are asking (safe and 6-10% return) does not exist at this point in time.
Thank you for your reply. That answers my question.

My next question would be: If an income-investing method is off the table, how can I best put this money to work for me?
Topic Author
PNWpilot
Posts: 223
Joined: Fri Sep 17, 2021 12:48 pm

Re: Income investment strategy

Post by PNWpilot »

KlangFool wrote: Fri Sep 17, 2021 3:25 pm
PNWpilot wrote: Fri Sep 17, 2021 3:09 pm Hi all,

I’d like some advice on how to best invest some money we have saved. My wife and I have approximately $150k that I would like to invest in an income-focused manner.
PNWpilot,

How does this makes any sense unless you enjoy paying a lot more taxes?

You have two choices:

150K -> pay out 5% -> $7,500

A) Pay out the $7,500 as ordinary income and you pay 20+% taxes for the $7,500 income

B) Pay out the $7,500 as capital gain and you pay 0% long term capital gain.

What would you choose? (A) or (B)?

KlangFool
Thank you for your reply. I see your point.

I'm trying to determine a strategy that can put this money to work rather than just sitting in my savings account collecting 0.1% interest.
KlangFool
Posts: 31426
Joined: Sat Oct 11, 2008 12:35 pm

Re: Income investment strategy

Post by KlangFool »

PNWpilot wrote: Fri Sep 17, 2021 4:00 pm
KlangFool wrote: Fri Sep 17, 2021 3:25 pm
PNWpilot wrote: Fri Sep 17, 2021 3:09 pm Hi all,

I’d like some advice on how to best invest some money we have saved. My wife and I have approximately $150k that I would like to invest in an income-focused manner.
PNWpilot,

How does this makes any sense unless you enjoy paying a lot more taxes?

You have two choices:

150K -> pay out 5% -> $7,500

A) Pay out the $7,500 as ordinary income and you pay 20+% taxes for the $7,500 income

B) Pay out the $7,500 as capital gain and you pay 0% long term capital gain.

What would you choose? (A) or (B)?

KlangFool
Thank you for your reply. I see your point.

I'm trying to determine a strategy that can put this money to work rather than just sitting in my savings account collecting 0.1% interest.
Then, why do you need a separate income portfolio?

You just invest this 150K into your main portfolio.

I only have one 60/40 portfolio. I have another 2 to 3 years of expense in CASH as my emergency fund (EF). The EF is separated from my 60/40 portfolio.

KlangFool
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gougou
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Re: Income investment strategy

Post by gougou »

You might want to consider cigarette companies, oil companies, pipeline MLPs, Chinese/Hong Kong stocks, BDCs, office or mortgage REITs which can pay 6% to 10%+ dividends and considered safe under some reasonable assumptions. Some of them (MLPs) offer tax deferred distributions.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
edudad
Posts: 66
Joined: Wed Mar 24, 2021 10:47 am

Re: Income investment strategy

Post by edudad »

There are multiple ways to generate income from $150k. Dividends is one easy way.

Another way is to invest in growth index fund, every quarter, look how much the fund as grown since last quarter, sell and withdraw that amount. It generates tax inefficient income. It's still income, so you pay a bit to Uncle Sam.

There are other strategies involving future contracts to generate sizable income with $150k, I will not talk about this here. But, I can tell you it's high risk, high reward game, if you know what you are doing and do it well, you can preserve capital and generate 20%+ in a year. There is better tax treatment of this comparatively, but you will still pay some/lower taxes on the income.
pkcrafter
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Location: CA
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Re: Income investment strategy

Post by pkcrafter »

PNWpilot wrote: Fri Sep 17, 2021 3:09 pm Hi all,

Welcome to the forum,


I’d like some advice on how to best invest some money we have saved. My wife and I have approximately $150k that I would like to invest in an income-focused manner. This money is separate from our retirement savings and emergency fund, the latter of which contains 6-months worth of expenses. We have no debt, no kids, and currently do not own a home. Our lifestyles are such that purchasing a home does not make sense right now. Home ownership might be in the cards 5-10 years from now. Until then, we’ll keep working, saving, and investing.

Question: What would a target yield be on an income portfolio? I’ve seen examples on the internet of income portfolios yielding between 6-10%, but I really don’t know much about this area of investing.

I'm not sure what you are referencing, but I don't know of any way to generate returns of 6-10% without taking significant risk.


My family has purchased many rental properties over the years and has been able to generate a nice monthly income with these purchases. I’d like to avoid the rental route as home values are sky-high, tenants can be a pain, and homes always need repairs. Plus, I don’t want to take on any debt as we’ve both worked hard enough to be debt-free.

Is there a possibility of creating an income portfolio of stocks, bonds, REITs, etc that would be able to generate steady yield with that amount of money? Or would the yield be so small that it wouldn’t make sense to risk our capital? I’m genuinely asking. We have a financial advisor who I am planning on meeting with, but I want more opinions on this as well.

#1. Please stick around and lean Boglehead investing.
2. Will this be a taxable or tax-deferred account?
3. If you going to invest, you have the risk of market volatility.


Preservation of capital would be important as this money will likely be used in the future, along with additional savings, to purchase a home. However, as mentioned earlier, home ownership is not an immediate goal of ours.

If you are planning a home purchase in the next 5 years, the usual recommendation is hold the cash. You might take some limited stock risk, but you aren't likely to generate returns of 6+%.

Here's a link to Vanguard's tax-managed balanced fund (~50/50). You might consider this plus a tax-efficient bond fund to reduce volatility, and potential returns.


https://investor.vanguard.com/mutual-fu ... file/VTMFX

Paul

Last edited by pkcrafter on Sun Sep 19, 2021 5:15 pm, edited 1 time in total.
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
RyeBourbon
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Location: Delaware/Philly

Re: Income investment strategy

Post by RyeBourbon »

There are some savings accounts that pay 0.4-0.5% - this is risk-free (FDIC insured).

You can get a little more with MYGAs, but it will tie up your money a little longer with a small amount of additional risk (insurance company default).

If you want to put your principal at risk, then of course there are other ways to get more yield.
Retired June 2023. AA = 55/35/10
delamer
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Joined: Tue Feb 08, 2011 5:13 pm

Re: Income investment strategy

Post by delamer »

You can’t generate income of 6%-plus in today’s environment without risk to principal.

You can get better returns than a savings account by using a CD-ladder, I bonds, TIPS, orother cash equivalents.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
exodusNH
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Re: Income investment strategy

Post by exodusNH »

RyeBourbon wrote: Sat Sep 18, 2021 1:00 pm There are some savings accounts that pay 0.4-0.5% - this is risk-free (FDIC insured).

You can get a little more with MYGAs, but it will tie up your money a little longer with a small amount of additional risk (insurance company default).

If you want to put your principal at risk, then of course there are other ways to get more yield.
MYGAs are fine, but unless they mature after you turn 59.5, you will have to keep rolling the money into MYGAs or pay the IRS penalty.
RyeBourbon
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Re: Income investment strategy

Post by RyeBourbon »

exodusNH wrote: Sat Sep 18, 2021 2:33 pm
RyeBourbon wrote: Sat Sep 18, 2021 1:00 pm There are some savings accounts that pay 0.4-0.5% - this is risk-free (FDIC insured).

You can get a little more with MYGAs, but it will tie up your money a little longer with a small amount of additional risk (insurance company default).

If you want to put your principal at risk, then of course there are other ways to get more yield.
MYGAs are fine, but unless they mature after you turn 59.5, you will have to keep rolling the money into MYGAs or pay the IRS penalty.
Thanks. In all the times I've seen them mentioned on here, I hadn't seen reference to the age restriction on distributions.

Of course, the penalty might be worth paying.
Retired June 2023. AA = 55/35/10
exodusNH
Posts: 10249
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Re: Income investment strategy

Post by exodusNH »

PNWpilot wrote: Fri Sep 17, 2021 3:09 pm Hi all,

I’d like some advice on how to best invest some money we have saved. My wife and I have approximately $150k that I would like to invest in an income-focused manner. This money is separate from our retirement savings and emergency fund, the latter of which contains 6-months worth of expenses. We have no debt, no kids, and currently do not own a home. Our lifestyles are such that purchasing a home does not make sense right now. Home ownership might be in the cards 5-10 years from now. Until then, we’ll keep working, saving, and investing.

Question: What would a target yield be on an income portfolio? I’ve seen examples on the internet of income portfolios yielding between 6-10%, but I really don’t know much about this area of investing.

My family has purchased many rental properties over the years and has been able to generate a nice monthly income with these purchases. I’d like to avoid the rental route as home values are sky-high, tenants can be a pain, and homes always need repairs. Plus, I don’t want to take on any debt as we’ve both worked hard enough to be debt-free.

Is there a possibility of creating an income portfolio of stocks, bonds, REITs, etc that would be able to generate steady yield with that amount of money? Or would the yield be so small that it wouldn’t make sense to risk our capital? I’m genuinely asking. We have a financial advisor who I am planning on meeting with, but I want more opinions on this as well.

Preservation of capital would be important as this money will likely be used in the future, along with additional savings, to purchase a home. However, as mentioned earlier, home ownership is not an immediate goal of ours.

Thanks,
PNWpilot
You and your wife can buy $20K in 2021 and $20K in 2020 of I Bonds. They're guaranteed by the US government. As long as you don't need the funds for 12 months, they're a great option. You will lose the last 3 months of interest if you cash them in before 5 years.

So, that can lock up $40K.

You can get online savings accounts paying 0.50%-.0.60%.

Other than that, a short-term bond fund is the only other option that has a minimal risk of principal. But those aren't paying too much more than the savings accounts right now.
Doctor Rhythm
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Re: Income investment strategy

Post by Doctor Rhythm »

I think the first question is “Do you actually need (unearned) income?” In other words, do you need a steady flow of cash from your investments in order to pay for stuff? This is not common for working people, and even retirees without adequate income (pension, SS) don’t need investment income if they can sell their securities. I suppose your real estate example is a good exception: someone whose lives off their real estate investment needs income since selling property isn’t always appropriate or possible.
Retired Bill
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Re: Income investment strategy

Post by Retired Bill »

Although it would take awhile, but could consider some I Bonds. Limited to $10,000 per social security number annually. Current rate is 3.54% interest. No matter what date of a month you buy them, interest starts to accrue from the first of that month. Interest adjusts every 6 months. Next date to change is November 1st. If redeem before held 5 years, will lose the last 3 months interest. Can't redeem the first 12 months. With inflation rate higher on these bonds than short term rates at present time, these are the way to go other than for the low amount allowed to purchase and another account to deal with. Also, could work as an alternative investment for some of the earmarked emergency funds once get past that 1st year of no redemptions. Hope I didn't misstate anything.
maj
Posts: 487
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Re: Income investment strategy

Post by maj »

If you want income, and agree that earning 6-10% at this time is too risky, are you able to settle for a reasonably safe stock investment, highly diversified, like Vanguard High Dividend Yield Fund. If you can stomach bear markets , you can--long term--reasonably assume you have a quality income stock investment.

peace
nix4me
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Re: Income investment strategy

Post by nix4me »

Dividend Stocks and ETFs:
SCHD
DIVO
NUSI
JEPI
RYLD
O
VZ
PM
ABBV
CLX
JPM
KMB
KHC
MMM
XOM
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Sandtrap
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Re: Income investment strategy

Post by Sandtrap »

Are you going to need this 150k to buy a home in 5 years?

j🌺
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Topic Author
PNWpilot
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Re: Income investment strategy

Post by PNWpilot »

Sandtrap wrote: Sun Sep 19, 2021 7:49 pm Are you going to need this 150k to buy a home in 5 years?

j🌺
Yes. As several have mentioned here and in other threads, what I originally thought I would like to do with this money is a pipedream. I'm glad I came to this forum prior to making any further decision.
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Sandtrap
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Re: Income investment strategy

Post by Sandtrap »

PNWpilot wrote: Mon Sep 20, 2021 6:34 am
Sandtrap wrote: Sun Sep 19, 2021 7:49 pm Are you going to need this 150k to buy a home in 5 years?[

j🌺
Yes. As several have mentioned here and in other threads, what I originally thought I would like to do with this money is a pipedream. I'm glad I came to this forum prior to making any further decision.
For a 3-5 year time frame, this is considered "short term" in the market investing world
(by some, not everyone:dislaimer)

Example: The "Market" took a 34% drop in value in March 2020. Yes, there was a quick recovery, but that is not always so.
So, imagine if that was your 150,000 dollars in savings that you invested and needed for a home.
How would you feel?
What would you do?
What would you wish you did when investing it?

So, some options for some with a short investment/savings time frame.
(dislaimer: some, not everyone)

1. CD's, Money Market, High Yield Accounts, etc.
a) Security of Principle
b) Liquidity
c) Accessibility (you might find a great deal in 2-3 years on what you want, who knows. . .be ready).

2. Moderate Index Fund investment.
IE: Vanguard Balanced Index Fund 60/40 allocation, balance of equity/fixed, risk/return.
a) However, if within 3-5 years and the principle value of this fund (or any fund you invest in) drops below your initial investment, you will have to be committed to way, perhaps many years or longer, until it eventually, hopefully, recovers.
Or, absorb the loss of principle as a risk that you took and simple work with the lesser value to buy a home.

3. 100% Equity fund. IE: High Yield Dividend Fund, Sector Fund, whatever.
a) Be prepared for at least what happened in March 2020 to the value of this fund, or greater, or longer. No one knows.

PM me as you wish.
j :D

dis laimer: zillions of paths and options and opinonions on zillions of things by zillions of people and things.
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