Growing up, did you ever conduct experiments or participate in your schools science fair? Back in the day I remember going to the library to research my project and hand writing notes on the poster board. It took time, energy, and effort to develop a hypothesis, gather the material, follow procedures, and detail your research and conclusions. It’s a similar situation that many retirees are being forced to relive as they seek out new sources of retirement income.
Due to the current ultra-low interest rate environment, more and more investors have had to leave the safety of traditional retirement investments such as bank CDs for riskier assets. They have essentially been forced to experiment with alternatives such as dividend paying stock funds and high yield bond ETFs to maintain their lifestyle. However, many people have taken the leap without all the necessary steps for a good experiment. They’ve skipped the research and jumped to the conclusion… that the alternatives provide more money than CDs right now.
As a result, I want to offer three retirement experiments for investors to undertake to seek out income alternatives. Now, most of my clients are retired and conservative, so we’re not talking about conducting income experiments with Bitcoins, IPO’s or non-traded REITs. Instead, I have a list of fairly common, yet underutilized investment types in which to conduct some learning research. The focus is on three areas that I’d like to encourage you to get more familiar with. This is not a recommendation to go out and start investing in them. As a substitute, I want you to check out some websites, sign up for a newsletter, and even pick up the phone to find out more about how these investments can help you in your quest for retirement income.
Overall, my hypothesis for this post is simple: Time and education produces knowledgeable investors.
The three areas we will be concentrating on are:
1) Online Banking
2) Individual Bonds
3) Preferred Stocks
1) Online Banks
I’m always surprised at the number of people who have an online brokerage account but haven’t ventured into the online banking arena. Fact is, many people underestimate the difference in rates they can get from an online bank when compared to a local bank. At the time of this post, bankrate.com suggests local banks in my area are offering 12 months specials around 0.22%. Some do offer higher rates, yet often come with caveats that require customers to have a checking account or sign up for direct deposit.
On the other hand, you can’t walk into an online bank but the great rate doesn’t usually come with other requirements. In fact, Ally Bank currently has an11 month CD advertised at 0.87%. That’s a noticeable difference and worthy of further investigation. (Industry Secret: Most online banks offer these same rates for IRA’s as well as corporate and association funds)
What’s comforting about online banking is that you need an existing checking account to set it up and move money to and from the account. That’s good news for people who are afraid they’ll have to retire their current checking account for the rate increase. Therefore, begin your online bank experiment by doing a web search for online banks that are FDIC insured. Next, pick up the phone or email customer service with your major concerns and questions including all of your “what if” concerns. Then share you results and conclusion with others.
2) Individual Bonds
Individual bonds are one of my favorite investment types because most investors know very little about them, and haven’t encountered a professional that can explain them in terms they understand. Typically, individual bonds are portrayed as boring investments that are subservient to stocks. However, there is a lot of skill and research that goes into selecting the right one.
One reason to get more comfortable with them is because when interest rates do eventually rise, bond funds and ETFs can lose principal. Individual bonds, though, can retain principal as long as you hold them to maturity and the company doesn’t go bankrupt. Fortunately, I’ve written another article on this exact topic: How To Buy An Individual Bond. Therefore, start your individual bond experience by reading the article and doing some bond research. This has to be done through an online broker like Scottrade or TD Ameritrade. I have yet to see a free tool that allows you to find various bond types and pricing simply because they don’t hold an inventory of them. With that in mind, begin concentrating your experiments on corporate bonds by comparing and contrasting how different maturity dates (2015 vs 2017) and credit ratings (AA vs BB) impact the rate available.
3) Preferred Stocks
Preferred stocks are another favorite investment type simply because they garner a lot of interest. People have heard of them but can’t quite put their finger on exactly what they are. In a nut shell, they are a hybrid security that’s somewhere in between a stock and a bond. They have characteristics of both, in that they pay dividends like common stock yet tend to fluctuate less in price like bonds.
One of the challenges with preferreds is most people have no idea where to get information on them… but you’re in luck. Check out QuantumOnline.com. They offer a bevy of education and research for interested investors. Since we’re talking about income opportunities for more conservative investors, look for preferred stocks that are investment grade and have a cumulative dividend. As you may know, companies are graded on how credit worthy they are. The range for investment grade is AAA, AA, A, BBB. Anything BB and lower is considered junk status and carries more risk of default. Understandably, the more risk you take the more reward you’re offered in the form of yield. Of note, is the fact that many people own a high yield bond fund of some sort that is full of BB and lower rated bonds. It’s another example of people who skipped the research and jumped right to the conclusion of more income.
Cumulative dividends are important for many income oriented investors as well because they aren’t based on a company’s earnings or profits. They have to be paid regardless. Non-cumulative dividends are at the discretion of the company and their board, meaning if things go south or get bad for a period of time they can suspend payments, thereby reducing your income. For your preferred experiment, add some cumulative and non-cumulative ticker symbols to a watch list. Be sure to add both the preferred stocks ticker as well as common stock ticker. For example Wells Fargo has a preferred share with the ticker WFC-N and you can also follow the common stock, ticker symbol WFC. Check-in each day or week to see how each performs based on market conditions and change in interest rates.
While I wouldn’t use your portfolio experiments as your child’s or grandchild’s science fair project this year, taking the time to learn more about how various investments can generate income for you can pay off in dollars and cents instead of a 1st place blue ribbon. Like other scientific experiments, be diligent in your efforts, take good notes, and share your procedures, materials, and conclusions with others.
Source: Forbes Business