How to Invest for Income
Elliot Raphaelson

HOME > WEALTH

If your investment advisor tells you he can get high income or high rates of return without risk, it's time for you to obtain a new advisor. There are no high rates of return without risk. Moreover, in today's market, even investments that once were considered conservative are fraught with risk, which makes investing to generate high income especially tricky. The biggest challenge under current market conditions is that the most conservative investments return almost nothing, so any investor interested in income has to take some risk. In this article, I will be discussing some investment alternatives that can provide you with higher income, but, while conservative, they are not risk-free.

Conservative Investments

Most savers and investors know that the Federal Reserve has actively kept interest rates low over the last few years in order to stimulate the economy. The result has been that typically conservative investments -- namely, Treasury bills, money market accounts, money market funds, and short-term certificates of deposit -- now pay investors very low rates of return, generally less than 1 percent. In order to obtain a rate of return above 2 percent, you would have to commit your funds to something like a five-year certificate of deposit. If you require funds on a short-term basis, then you should use these conservative investments in order to avoid any possible capital loss.

Common Stocks That Pay High Dividends

Most investors who had significant exposure to the stock market in 2008 saw the value of their portfolios drop significantly. Many of these people responded by selling their stocks and common stock mutual funds at the wrong time, thereby missing out on the recovery that has taken place since then. Because of those 2008 losses, and the resultant loss of trust, many investors are now skeptical about investing a significant portion of their portfolio in the stock market. But unfortunately, most people can't afford to rely solely on conservative, low-return investments. I know I can't. In 2009 and 2010, investors poured money into individual bonds and bond mutual funds. Until the last quarter of 2010, these investments did very well. However, in the last quarter of 2010, and so far in 2011, individual bonds and intermediate and long-term bond funds have lost a great deal of their value. Bond experts like Bill Gross of Pimco, a leading investment company, have been warning investors to lessen their exposure to bonds, and especially to avoid long-term bonds of any kind. I have heeded his advice, and I suggest you do the same.

One alternative to consider is investing in common stocks that have a history of both high dividends and frequent dividend increases. You should know, however, that corporations are under no obligation to pay any dividends regardless of prior history. For example, many of the major banks that ran into financial difficulties in 2008 either cut their dividend or eliminated it entirely. Most of these banks are now reinstating, and even increasing, their dividend, but there are no guarantees.

Because of changing economic conditions, no one can predict with certainty which corporations will be able to maintain their dividend and/or increase it regularly. For that reason, it is important to have a diversified portfolio. The easiest way to do that is through a "no-load" mutual fund such as Vanguard or Fidelity. Both have funds that concentrate on corporations with an excellent history of maintaining or increasing dividends. I have personally invested in Vanguard's Dividend Appreciation Index Fund (symbol: VDAIX) for many years.

In subsequent columns, I will be discussing other conservative, income-producing investments that could have a place in your portfolio.

Available at Amazon.com: The Triumph of Value Investing: Smart Money Tactics for the Postrecession Era

The Seven Deadly Sins of Investing: How to Conquer Your Worst Impulses and Save Your Financial Future

Generation Earn: The Young Professional's Guide to Spending, Investing, and Giving Back

What Investors Really Want: Know What Drives Investor Behavior and Make Smarter Financial Decisions