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Post on 21-Aug-2015



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  1. 1. By Matt Frankel, Investment Planning Investing For Income: Which is the best way for you? 1
  2. 2. When it comes to investing for income, there are several choices, including: Bonds Dividend stocks Annuities CDs 2 Source: via Flickr
  3. 3. Lets take a closer look at each type of income investment 3 August 20, 2015
  4. 4. Bonds pay a fixed dollar amount of interest per year. When the bond matures, your original investment is returned. For example, if you buy a 30-year corporate bond for $1,000 with a coupon rate of 6%, youll receive $60 per year for 30 years, and then your original $1,000 will be returned. Note: Coupon rate refers to the interest rate a bond pays as a percentage of its face value August 20, 2015 4 1. Bonds
  5. 5. Even though a bond pays a fixed interest rate, its value can change in response to prevailing interest rates or changes in the credit quality of the issuer. This affects bonds with longer maturities more than short-term bonds. Bonds also have inflation risk Since your income doesnt change, inflation can erode your purchasing power over time. August 20, 2015 5 Bond risks
  6. 6. Consider a Treasury bond with a 4% yield (face value $1,000) If market interest rates rise to 5%, thats what investors will expect to receive. So, your bonds face value could drop to roughly $800. In reality, the bond will still return $1,000 at maturity, so its value wouldnt drop quite that much. However, interest rate risk is something to keep in mind when investing in bonds. 6 August 20, 2015
  7. 7. Here are some of the pros and cons of investing in bonds August 20, 2015 7 Pros Cons Steady, predictable income Interest rate, credit risk, and inflation risk Prices tend to be less volatile than stocks Long-term returns tend to be lower than other asset classes Can be safe (investment- grade) To get a higher yield, you need to take on more risk (junk bonds) Potential tax benefits (municipal bonds, for example) Some bonds have low liquidity
  8. 8. Dividend stocks have the potential for excellent long-term returns, since they could go up in value over time And, the dividend payments could increase over time, helping your income keep pace with inflation However, there can be more risk of a loss than most other income investments August 20, 2015 8 2. Dividend stocks
  9. 9. The best dividend stocks tend to have certain characteristics A solid history of growing revenue Annual dividend increases Large companies with diverse revenue streams Stocks that pay out a relatively low percentage of their earnings 9 August 20, 2015 Source: via Flickr
  10. 10. Stock (Symbol) Current Yield Years of consecutive increases Procter & Gamble (PG) 3.25% 58 3M (MMM) 2.63% 56 Coca Cola (KO) 3.20% 52 Johnson & Johnson (JNJ) 2.99% 52 Target (TGT) 2.53% 47 Wal-Mart (WMT) 2.69% 40 McDonalds (MCD) 3.49% 38 A good example are the dividend aristocrats These are stocks that have increased their dividends for at least 25 consecutive years A sampling of the dividend aristocrats is listed here 10 August 20, 2015
  11. 11. Dividend stocks should be a staple of every income portfolio However, make sure you invest in high-quality dividend stocks like the ones mentioned here As you get older, its wise to reduce your exposure to stocks One popular guideline to determine the percentage of your portfolio that should be invested in stocks is to subtract your age from 110 August 20, 2015 11
  12. 12. An annuity is essentially a lump sum payment to a company in exchange for a guaranteed income stream for life While an annuity can provide worry-free income, there are some things to keep in mind August 20, 2015 12 3. Annuities
  13. 13. Many annuities have high fees, especially the more complex types There is a saying annuities are not bought, they are sold Make sure you compare the fees from several companies before choosing an annuity 13 August 20, 2015 Source: Flickr user quazie
  14. 14. Immediate annuity The simplest kind, where you exchange a sum of money for an income stream. Deferred-income annuity Exchange of money for an income stream that begins in the future. Fixed annuity Income payments are fixed for a certain amount of time. Variable annuity Income payments vary over time, depending on performance of underlying investments. August 20, 2015 14 Major types of annuities
  15. 15. Annuity pros and cons August 20, 2015 15 Pros Cons Steady income for life Inflation risk Principle protection is available Low returns when annuities are purchased in low-rate environments Potential tax advantages Some have high fees Potential negative tax implications for your heirs Click here if youd like to learn more about annuities
  16. 16. CDs are the among the safest income investments you can possibly make CDs are guaranteed by the FDIC up to $____ While CDs pay more interest than savings accounts, you are required to keep your money tied up for a certain length of time August 20, 2015 16 4. Certificates of Deposit (CDs)
  17. 17. The biggest downside to investing in CDs is the low return potential In fact, the income you get from CDs is unlikely to even keep pace with inflation National average CD interest rates (as of August 18, 2015) 17 August 20, 2015 Time to maturity Interest rate 3 months 0.15% 6 months 0.23% 1 year 0.37% 2 years 0.57% 3 years 0.78% 5 years 1.20%
  18. 18. Of course, there are other ways to create income, such as Purchasing investment properties to rent out Buying a business Peer-to-peer lending Preferred stocks August 20, 2015 18
  19. 19. These can all be valid ways to generate income in retirement However, the majority of retirees can use the four methods mentioned here to meet their income needs August 20, 2015 19
  20. 20. 20 You should also read The $60,000 Social Security bonus most retirees overlook CLICK HERE TO READ NOW


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