An income portfolio for pre-retirement investors


Rock-bottom yields have created an unpleasant dilemma for investors approaching retirement who need steady sources of income.

The Federal Reserve’s easy monetary policies are forcing retirees to stretch for income. If investors want yield, they have to venture outside traditional safe havens such as Treasuries and short-term bonds. After all, the average yield on a one-year CD is only 0.23%.

Darren McCammon, a new manager on Covestor, spends a lot of time thinking about the income challenges facing pre-retirement investors. His solution is the Fifty Plus portfolio.

“This is a strategy I’ve used with some older members of my own family, and a lot of my clients are over 50,” McCammon says. “The Fifty Plus portfolio is designed to throw off significant income.”

The portfolio may invest in high-yield sectors such as real estate investment trusts (REITs), preferred shares, master limited partnerships (MLPs), business development companies (BDCs) and dividend-paying stocks. McCammon may also use ETFs to get exposure to income-producing sectors.The Fifty Plus portfolio invests in areas of the market that are generally riskier than bonds, so investors should be prepared for significantly higher volatility than U.S. Treasuries, for instance.

The strategy generally holds at least 20 positions to diversify across asset classes, and aims for volatility similar to the S&P 500, but with more income. So conservative investors looking for yield should be ready to endure price swings in line with stock market volatility.

McCammon incorporates macroeconomic research into his approach. Some of the holdings in the Fifty Plus portfolio have gotten a tailwind from the Fed’s cheap money policies, such as mortgage REITs. Also, certain classes of MLPs have benefitted from the fracking boom.

Additionally, McCammon employs fundamental screens when choosing sectors, including valuations, momentum and dividend growth. In particular, he hunts for double-digit yields, and is finding them in some BDCs and mortgage REITs. For example, iShares Mortgage Real Estate Capped ETF (REM) and Market Vectors Mortgage REIT Income ETF are paying a 30-day SEC yields of 13.3% and 10.9%, respectively.

“Yields are low and investors need income. I think these asset classes will remain popular even if interest rates rise,” McCammon said. “Fifty Plus portfolio isn’t for everyone. It’s designed to appeal to a niche, but a broad niche. Investors nearing retirement want income, and this group isn’t going away anytime soon.”

Photo Credit: SalFalko

DISCLAIMER: The investments discussed are held in client accounts as of October 31, 2013. These investments may or may not be currently held in client accounts. Real Estate Investment Trusts (REITs) are subject to various risks such as illiquidity, real estate market conditions and the product’s fees will impact total performance. Investments in MLPs include the risks of declines in energy and commodity prices, decreases in energy demand, adverse weather condition, natural disasters, and changes in tax laws. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.