Investments to Consider for Your Income Portfolio

 - 

One of the ways you can add a little more income diversity to your life is to start an income portfolio. An income portfolio is comprised of investments specifically designed to provide you with cash flow now. It’s not about seeing a large amount of capital appreciation (although that is possible in some cases); rather, it’s about creating a regular stream of income that you can use.

You can start your income portfolio out slow, adding to it over time, and expecting it to take seven to 10 years – or more – before you see a significant income from your portfolio. The key, for those without a lot of capital, is to establish a spending plan that allows for regular investment. However, once your portfolio is established, you can manage it so that you receive monthly or quarterly payments from your investments.
What Assets Should Be Included in an Income Portfolio?

Ultimately, how you decide your income should look is up to you, depending on your risk tolerance, and your goals. As you build your income portfolio, here are a few assets to consider:

Dividend paying stocks: One of the best ways to build an income portfolio is to use dividend paying stocks. A dividend income portfolio can help you see the chance for capital appreciation as well as for regular income. The right stocks can provide you with peace of mind, and stable cash flow.

Bonds: With bonds, you essentially loan money to an organization. You receive interest payments during the term of the bond, and the principal back at the end of the term. The interest you receive can be a source of income.

Real estate: If you rent out real estate that you own, you can receive regular income from the payments. Additionally, if you invest in REITs, you can receive regular dividends without actually owning property.

P2P loans/microloans: One popular addition to some income portfolios is the P2P loan. You can loan money to others, and receive regular payments. The interest you receive can result in regular income.

High yield cash products: Many people like the safety of cash, and choose high-yield cash products like CDs and savings accounts. Your money is insured by the FDIC if you get the right products, and you can usually receive regular interest payments.

Anytime you invest, though, you need to realize that there is the risk of loss. You might see your real estate values plummet, and stocks can lead to capital losses. Bonds and loans can be defaulted on. Even with cash products there is the risk of loss as inflation threatens to erode your real returns. Before you put together your income portfolio, make sure you understand the risks involved, and consider diversifying to better protect against losses from market volatility.


Are Solar Stocks Going Dark?

 - 

Green energy is supposed to be tomorrow’s answer to our dependence on foreign energy sources, mainly oil. This, along with wind power and to a smaller extent, natural gas are what the Federal Government believes is the answer for a country who currently consumes 20 billion barrels of oil each day.

Although these green energy alternatives are in their infancy, the plans to move America away from fossil fuels doesn’t seem to be gaining a lot of momentum and that’s especially true in the solar space. What’s causing some of the biggest solar companies to merge with other companies? Why are some of the sector’s bellwether companies seeing their stock prices fall as much as 80%? Part of the answer has a tone familiar to Americans who follow Washington.

First Solar

Take First Solar for example. First Solar (FSLR) is a Phoenix Arizona based company who manufactures photovoltaic solar cells. They were the first to break the $1 barrier where the cost to produce one watt of energy is less than $1. First Solar is widely considered to be the biggest player in the American solar energy space.

If that’s the case, their stock has probably taken the trajectory of stocks like Apple who have continually risen throughout the recent past. In fact, the opposite is true. First Solar reached its peak in May of 2008 when the price was just over $311 per share. In September of 2011, First Solar traded at only $101.

Sunpower

Another company, Sunpower Corporation (SPWR) started producing solar cells in the 1970s and refer to themselves as the global leader in solar power. Also in the business of photovoltaic solar cells, their stock hit its 5 year peak in December of 2007 at $128. Now in September of 2001, Sunpower trades at just over $14.

What’s wrong with these companies? If you ask them, they will undoubtedly tell you that it’s a function of the slow economy but the same economy has allowed companies in other industries to thrive. The problem largely comes from China. Companies outside of the United States have found ways to make these photovoltaic solar cells at a fraction of the price of many American companies. Also, even with government subsidies, solar energy has a large upfront cost making it much more expensive to produce than energy produced at coal plants.

Is it possible that these companies became too content with being in an industry that was highly subsidized by world governments and didn’t work to get their prices down? As government incentives have either drastically diminished or been completely non-renewed by world leaders, the solar industry has gone with them.

Government Complication

And finally, no story would be complete without some government complication. In one case, the Federal Government has provided more than $500 million in funding in the form of ultra low interest advances to Solyndra, a solar company who was losing 84 cents for every one dollar of sales. When asked by a Congressional committee to appear and explain how the low interest cash advance provided by the government was being used. Solyndra’s CEO stated that he had a scheduling conflict and couldn’t make it. Since this time, Solyndra has filed for Chapter 11 bankruptcy. The chances of the American taxpayers getting their $500 million back seem exceeding low now.

Bottom Line

Whether or not the solar industry has a bright future remains in doubt. Very little has been done to move away from America’s dependence on foreign oil and the green energy alternatives are struggling to gain a foothold in an industry that is dominated by rich oil tycoons.

In News

Fixed Income: Don’t Get Too Cute

 - 

I love to play the market. I like to trade, I like to speculate and I like to watch the tickers and listen to CNBC. The problem is that I, like so many others who won’t admit it, I am not very good at it. So what I do is I set aside a small amount of money in my portfolios for trading purposes.

I try different options strategies, take a chance on a name that’s breaking out or something else that generally lasts a week or two. I generally get it right about half the time allowing me to keep feeding my addiction without losing money. Really big secret, right?

When was the last time you read an article about some cute strategy with your fixed income investments? You can normally tell what’s coming by reading the first paragraph. It normally starts with, “interest rates are sure to rise.” Well, duh!

As I write this, I’m watching the Packers game and with less than a minute left in the game, the Packers have the ball and they’re up by six points. I’m now making the prediction that they’re going to win. Well, duh! I’m hardly a football guru coming up with that gutsy call.

incomeRight after such a game changing call, the author often goes on to tell you how you should do something that sounds like an equity strategy because something will happen in Europe, QE 3.5 will happen and something concerning the yield curve will surly cause those high bond prices that we’ve loved for so long to drop because of their inverse relationship to interest rates and that will leave you, the unsuspecting bond investor high and dry.

Well, I have a problem with theories like this. I understand the need for thinking ahead and addressing market headwinds but my overriding philosophy is to respond to what the market is giving me now. Any time I’ve tried to get cute with market timing I’ve found myself on the losing end somehow. I’ve either lost money or spent too much time waiting for a new setup with cash sitting on the sideline.

I read an article just yesterday where the author advocated cashing out of bonds and going in to cash until a setup emerges after the interest rate hike. Here’s the problems with that: First, it’s much too early. Interest rates will go up but probably not any time soon. I wouldn’t advocate listening to somebody who claims to be a terrible market timer but I’m relatively confident that rates will be low for “an extended period” as the Fed has said in every recent statement.

Even if they hadn’t said that, the market isn’t telling us that it will be healthy in a matter of a few months. If the mark of an amateur investor is selling too early, this seems like a perfect example of that.

Next, why would you go to cash? I do believe that it would be ill advised to commit to long dated bonds since interest rate risk is likely to come to fruition and the investor could set themselves up for a large capital loss either realized by cashing out or unrealized by sitting in a low yielding bond until maturity but there are ways to mitigate this.

How about purchasing high yielding corporates of underrated companies? I’m living proof that the low interest rate environment has pushed fixed income investors up the risk spectrum but because of that, I’m ok with longer dated bonds when they’re yielding 7%. Even as interest rates rise, I plan to hold these bonds to maturity and I bought them at a discount anyway so my return relative to interest rates will go from pretty darn impressive to nominal at worst.

Bonds are just like stocks. There are some underrated bonds out there. After careful research I’m confident that my high yield corporates were issued by underrated companies who are being forced to give me some great coupons.

Want a little more flexibility with your fixed income capital? How about keeping your money in bond ETFs until the environment reverts to more of a long term mean? Set a stop loss if you don’t want to own the funds for the long term but you can always change the weighting later on if you get spooked. Don’t try to time it. Position your money in a way that gives you liquid means to respond when necessary.

Here’s my point: there are way too many articles that advocate playing some sort of market timing games with your fixed income allocation. If it doesn’t work with something as liquid as equities, why would it work any better with fixed income? If you think speculation on stock prices is hard, try speculating on interest rates.

Don’t get cute. Take what the market gives you and use your fixed income for what it is: Fixed income. Speculate on your stocks if you must.


Stock Buybacks vs Paying A Dividend

 - 

Famed investor Warren Buffett knows a thing or two about tax law and he knows how to help those who invest with him. He recently announced something (and also didn’t announce something) that works in the favor of all of his Berkshire Hathaway investors and many didn’t even notice.

There’s no doubt that every income investor loves a dividend. These interest type payments provide steady income regardless of short term, non-systemic market conditions but there’s a problem with dividends. When you’re a stock holder you know that you don’t have to pay taxes on your gains until you sell the stock.

That is especially advantageous for long term investors because this type of tax treatment allows somebody with a taxable brokerage account to run it like an IRA without contribution limits. It is rarely as simple as that but in theory, a stock investor who had a portfolio of stocks that paid no dividends wouldn’t pay any taxes in years where they sold nothing.

dividendsDividends, while attractive as a steady source of income are taxed each year at a rate of 15% provided you “qualify”. (We’ll talk about qualified dividends in another article) Although this may change if the Bush tax cuts are repealed, as of now the 15% rate is much better than being taxed at your normal income tax bracket but you still have a tax liability on those dividends in your taxable account. (If you have a traditional IRA you won’t pay taxes until you begin to receive payouts.)

Warren Buffett knows that if he issues a dividend. A dividend it cashes you out of some of your holdings. Let’s say you purchased 100 shares of stock for $50 per share for a total of $5,000. Then, that company declares a $2 dividend. On the ex-dividend day, your $50 stock (assuming it didn’t move in price) becomes a $48 stock and you later receive a $200 dividend payout. Rather than keeping your money in the stock, you receive the dividend and get to pay at least a 15% dividend tax.

Buyback Example

But what if that same company bought back enough shares of their stock to make the value of your $50 stock rise $2 to $52 per share? You don’t have any tax to pay because you didn’t take a payout. You’ll pay it later but every penny you save in taxes is money that continues to compound for you.

Don’t think it’s a big deal? 15% of your $200 dividend check is $30. If you were to lose $30 per year from the tax you paid on those dividends, you’ve lost out on about $2,300 after 30 years.

Warren Buffett knows a thing or two about taxes because that’s what he plans to do. It saves his company money and it saves you money if you’re a share holder.

Bottom Line

Don’t get caught up in the thinking that dividends are good and everything else isn’t. Investing offers nothing for free. When you see a buyback, remember that your share price will rise because of it and when you see a dividend, remember that it’s steady income but your losing 15% of your money that will no longer compound unless you deposit enough additional funds to make up for the tax loss.