Just the other day, I was discussing “preparing for retirement” with a small group of people, several of whom were already retired. None of them owned, or even heard of, closed-end equity or income funds (CEFs)…vehicles I’ve been using in professionally managed portfolios for decades.

Readers are assumed to have read the six questions and answers covered in Part One.

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7. Why do it seem like Wall Street, the media, and most investment advisers ignore CEFs, public REITs, and Master Limited Partnerships?

All three are income producers, and once “out there” in the market, they trade like stocks…on their own fundamental merits and at a price that depends solely on supply and demand. Unfortunately, income programs have never attracted the kind of attention and speculative zeal that has existed for any type of growth vehicle.

Income mutual funds and ETFs can create shares at will, with a market value equal to the NAV (net asset value). But the sole purpose of each is to increase market value and produce a stock market comparable “total return” number… revenue is rarely mentioned in their product descriptions.

A security for income purposes can stay in the same price range for years, only spending 6% to 10% in income to finance a college education, a retirement lifestyle, and world travel. But most investment advisers, ETF bearers, and mutual fund managers rate themselves on the annual “total return” their portfolios or indices produce… income programs simply don’t generate year-end trips or six figure bonuses.

• I myself was laid off a few times, just before the dot-com bubble burst, because my 10% to 15% “return” from high-quality, income-producing stocks simply couldn’t compete with the speculative fever that fueled the NASDAQ at 5000…

• But when the markets crashed in 2000, the “no NASDAQ, no IPO, no mutual funds = no problem“The operating creed produced significant growth and revenue.

Another issue is the compensation of broker/advisors at Wall Street firms…based entirely on the sale of proprietary products and “investment committee” recommendations. There is no room for slow growth based on high-quality dividend-paying stocks and closed-end funds for income-generating purposes.

Finally, the government’s myopia of market value and cost performance precludes any inclusion of CEF in 401k and other employer-sponsored investment programs. Vanguard’s VTINX Retirement Fund pays out less than 2% after a minimal fee; hundreds of much better diversified CEFs pay 7% and better after 2% or more in fees. Yet the DOL, FINRA, and SEC have somehow determined that 2% of spending money is better than 7% in what they have mislabeled “retirement income programs.”

• You will never see a CEF, not even a balanced portfolio or stock CEF, in a 401k stock selection menu. Public REITs and MLPs probably don’t exist either.

8. How many different types of CEF exist; what do investors pay for them; And are there penalties for frequently trading them?

CEFConnect.com lists 163 tax-free funds, 306 taxable, 131 US-equity and 204 non-US and others.

A partial list of types and sectors includes: Biotech, Commodities, Convertible Bonds, Covered Calls, Emerging Markets, Energy, Stock Dividends, Financials, General Stocks, Government Securities, Healthcare, High Yield, Limited Duration Bonds, MLP, Bonds mortgages, multi-sector income, diversified national municipals, preferred stocks, real estate, priority loans, 16 different single-state municipals, tax-advantaged stocks, and public services.

CEFs are purchased in the same way and at the same cost as individual stocks or ETFs, and there are no additional penalties, fees, or charges for selling them frequently…they trade for free in managed, paid-only accounts, and they always pay more income than their ETF and mutual fund peers.

9. What about DRIPs (Dividend Reinvestment Programs)?

There are at least four reasons why I choose not to use DRIP.

• I don’t like the idea of ​​adding positions on top of the original cost basis.

• I don’t like shopping when the demand is artificially high.

• I prefer to pool my monthly income and select reinvestment opportunities that allow me to reduce the cost of the position and increase the return at the same time.

• Investors rarely add portfolios to bear markets; just when I need flexibility to add new positions.

10. What are the most important things investors need to understand when it comes to income investing?

In reality, if an investor can focus his mind on just three things, he can become a successful income investor:

• The change in market value has no impact on income paid and rarely increases financial risk.

• The prices of rental securities vary inversely with interest rate change expectations (IRE)

• Securities for income purposes should be evaluated based on the amount and reliability of the income they produce.

Let’s say thirty years ago we bought a 4.5% IBM bond, a 2.2% 30-year Treasury note, and 400 shares of P&G 5.7% preferred stock, all at par, and We invest $10,000 in each. The annual income of $1,240 has been accumulated in cash.

In this time period, interest rates have fluctuated from a high of over 12% to recent lows of around 2%. They have made no fewer than fifteen significant management changes. The market value of our three “fixed income” securities has been above and below the “cost basis” dozens of times, while the portfolio’s “working capital” (cost basis of fixed income holdings) portfolio) grew every quarter.

• And every time the prices of these securities went down, their “current yield” went up while paying the same dividends and interest.

• So why does Wall Street make such a fuss when prices fall? Why indeed.

Over the years, we have accumulated $37,200 in dividends and interest; the bond and treasury note matured at $10k each, and the preferred stock still pays $142.50 per quarter.

So our cash account is now $57,200 and our working capital has grown to $67,200 while we haven’t lifted a finger or spent a moment worrying about fluctuating market values. This is the essence of income investing, which is precisely why it doesn’t make sense to view it in the same light as stock investing.

Investors must be reprogrammed to focus on income production from income investments and earn reasonable returns when produced through growth securities.

• What happens if we reinvest the income every quarter in similar values? Or he sold the stocks when they rose 5% or so… and reinvested proceeds in similar securities portfolios (CEFs), rather than individual entities, for diversification and higher returns?

• Assuming a profit of only $500 per year and an average interest rate of 5%, the “working capital” of the portfolio would grow to $168,700… a profit of approximately 462%. Income would be $8,434… a profit of 680%

I hope these conservative income numbers get you a little more excited about having some serious income purpose allocation in your “eventually a retirement income portfolio”…particularly income CEFs. Don’t let his counselor talk you out of it; Stock market investments are not designed to do the job of income…reliably, over the course of our retirement lives.

• CEFs allow anyone to invest in diversified portfolios of fixed income securities and, by design, always at higher rates than individual securities.

• CEFs provide a single liquid entity that allows investors to profit from IRE-caused price changes in either direction. Yes, that’s what I meant.

eleven Why take profit if a security’s income hasn’t changed?

Compound interest is the “holy grail” of income investing. A 5% profit realized and reinvested today will outperform the 5% received over the course of the next few months. Also, when interest rates are rising, opportunities for profit are slim and proceeds can be used more productively than in flat or falling interest rate environments.

So, let’s say we have a “limited duration” CEF bond with a yield of 6%. We have held it for 8 months, so we have already received 4.5% and can sell it today at a 4% profit. So we can get a nifty 8.5% (actually a bit more since we’ve reinvested previous earnings), in just eight months.

We can then compare prices to earnings on a new CEF with a yield of 6% or more and hope to do a similar trade soon with another of our holdings.

A second rollover strategy is to add several positions that are priced below the current cost basis and are yielding more than the CEF we just sold. This is a great way to improve the “current performance” of existing positions while ensuring that you have more opportunities to profit when interest rates drop.

12. How do you keep “working capital” growing?

Total working capital and the income it produces will continue to grow as long as income exceeds all withdrawals from the portfolio. Note that capital losses have no impact on income if the earnings can be reinvested at a higher “current” return…but working capital does suffer a temporary impact.

Portfolios stay on their asset allocation “track” with each batch of monthly rollover decisions, but the larger the income purpose “bucket”, the easier it is to ensure consistent growth in both income and capital of work.

13. What is retirement income preparation?

It is the ability to make this statement, unequivocally:

• Neither a stock market correction nor rising interest rates will have a negative impact on my retirement income. In fact, either scenario is more likely to allow me to grow both my income and working capital even faster.