What are the best investments for reliable income?
When considering the BEST investments for income, it means there are other ways that are not really bad per se, but they aren’t really the best. And what are these?.
We will first exclude all income from trading activities; options etc... These are all speculation. We can't rely on them. Like Mark Twain adviced in Following the Equator, There are two times in a man’s life when he should not speculate: when he can’t afford it, and when he can. All trading activities with your funds is a loser game, short-term and long-term. Best you avoid them form the very beginning.
In the investment side of things, once you talk about investment income, they first thing to come to mind are fixed-income investments, and then dividend investing. Are these really the best ways? If not, what could be?
Fixed-income investments are investments in bonds for a steady source of incoke. Government bonds or treasuries , and municipal bonds do not carry any credit risk, as they are backed by the full faith of the government. You get interest investing in them at the end of the bond maturity with the return of your capital. People will rather go for the safety of this fixed-income assets with the guaranteed income it gives.
Also, when companies make profit, they can decide to give this profit back to their sharesholders in the form of dividends. This is also taken as an income source for many. Many will rather only invest in high-dividend paying stocks as their investment strategy.
Then we also have income from annuities. This ones are what the insurance companies offer as a source of a steady regular income that will serve you your entire lifetime.
While nothing is wrong with getting income from these securities, but the question still is, are these the best? Can we solemnly rely on them? That is what we intend to expire breifly here.
Lets take a deeper look into all these ability sources of reliable income, beginning with annuities, then the one I consider to be the best for a reliable income.
This is simple an arrangement between you and an insurance company to pay you a 'guaranteed amount each month, for as long as you need it to serve you.
You give them either a lump sum or monthly sum and specify when you need it.
Basically, it bears the same operation as pension plans and social securities or even giving your money to a mutual funds money manager.
Their selling point is that no matter what happens to the market or the economy, your paycheck will be guaranteed month-to-month non-stop, for as long as you need it, either life, for a fixed period of time, or until the money runs out.
There are only two instance when it will stop: when you are dead. When you surrender or lapse the policy. Who wouldn't love that?
However, the major drawbacks to this guys are:
It is not self-directed investing. So you don't control in what assets your money is going into. You are only guaranteed of a particular amount for as long as you want.
It is not tax efficient. Your payments are charged at income tax level far higher than capital gain taxes from selling of securities.
Also, when you are locked in, you don't sign out easily without paying heavily for it. The whole program is designed to get you in, and then give you no easy way to get out.
To get you in, they promise you a high return, but unknowning to many, its only for the first year(and it's legal), after then you get whatever they say you get.
And lots of other disadvantages.
Ones you understand what happens in there, and the disservice they offer you, you will know they aren't actually there for you. You should do away with annuities.
This is the income you get from fixed-income assets: bonds, treasuries, money market funds etc...
While we are clamoring for a reliable income source, we have to know our time horizon is actually very long, and then the cost of living is constantly increasing. Bonds have been known historically to produce very inferior returns far less or in par with the inflation rate. By sticking to them, we are are to run out of money.
Shelby Cullom Davis said this about bonds a long time ago, 'Bonds promoted as offering risk-free returns are now priced to deliver return-free risk.’
Their meager returns couple with other risk associated with fixed-income investing, default risk, liquidity risk, price risk etc, it is complete financial succide to rely on these securities for income.
These are the income you get from investing in companies that pay high dividend, usually stocks of large cap companies.
A few things about dividend stocks.
When you focus on dividends you are selling yourself short from what you could get from your portfolio. Remember your portfolio is to serve you your entire lifespan.
Dividend stocks are mostly stocks of large cap companies, and they do go out of style too, sometimes for years even up to a decade. Imagine what that will do to maintaining your lifestyle.
Dividend doesn't say anything about the health of a firm. Sometimes it might be speaking of danger. A higher dividend yield can as well be a result of a fallen stock price, and not because the firm is safe.
There are no guarantees when it comes to dividends. They can be cut down or ax out altogether at anytime, most especially during a market crash. Then what will you do?
Dividend isn't the only way for firms to create shareholder's value.
What is more important is the total return from equiites ( dividends plus capital gains), and these has nothing to do with dividends. Milton Meler in 1961 made the first research in the dividends stocks. The paper was essential how dividends weren't necessary, and aren't a factor for a stocks' long term performance.
Essentially, you will be selling yourself short by focusing on dividend stocks alone.
Homegrown dividends -My recommendation
Remember, your asset allocation decision is what is responsible more than anything for the performnace and result you get from your investments.
Like I have already said, when you create a retirement plan it's important to focus on total return( which is capital gain plus dividend) rather than to focus only on dividend yields.
By focusing on only dividend yield you will lag behind badly in your portfolio performance as high-dividend stocks also go out of favor and for years too. And remember how long a time horizon you truely have after retirement.
So here you focus on harveting your portfolio for your cash needs by selling securities.
This is a lot cheaper and tax efficient than any of the other methods.
And you still maintain your original portfolio structure with nothing imparing it.
Since dividend stocks are mostly large cap stocks, your portfolio will include some dividend paying stocks, you will still be getting cashflow from dividends.Also, you will be cashing in on the interest payment from your bond allocation in your portfolio. So you will also still be getting income from fixed-income.
In summary, while there are some ways to get a reliable income from annuities, dividend stocks, fixed-income, etc, and nothing wrong with them, but you still have your time horizon in view, and you want your money not to out-live you. So it's important you go for the best investments for reliable income, which is to design your portfolio, and then harness it for the income you need.