focus on income in VP?

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gull1
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focus on income in VP?

Post by gull1 » Sat Aug 31, 2019 7:53 am

It definitely seems HB talks about speculation in the VP. If one is closer to retirement and wanting to bolster their income, do folks have a suggestion for how to assemble a VP that performs that role? Perhaps a blend of CD, annuities, AAA-insured munis or treasuries? Perhaps with a small portion in gold to hedge against inflation? I was also considering simply a infinite banking concept life insurance policy, as had been discussed here, as simply a hedge that grows consistently at low growth rates where cash could be withdrawn if needed via a policy loan, so as to lessen the need to withdraw if markets down.
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ochotona
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Re: focus on income in VP?

Post by ochotona » Sat Aug 31, 2019 8:35 am

Why not some Agency bonds or Mortgage Backed Securities? TVA, Federal Farm Credit, Federal Home Loan Bank, Government National Mortgage Association? AAA or AA+ rated, Government backed private corporations, pay more than Treasuries.
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Re: focus on income in VP?

Post by Kbg » Sat Aug 31, 2019 11:03 am

WFC.L preferred stock. current yield 5.1%

BAC.L 4.9%

Both are perpetual unless the common gets to a certain level
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Re: focus on income in VP?

Post by gull1 » Sat Aug 31, 2019 5:19 pm

Kbg wrote:
Sat Aug 31, 2019 11:03 am
WFC.L preferred stock. current yield 5.1%

BAC.L 4.9%

Both are perpetual unless the common gets to a certain level
Dumb question, but what reassurance do you have to get back your principal if the company has issues?
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Re: focus on income in VP?

Post by Smith1776 » Sat Aug 31, 2019 6:12 pm

I've held a Graham-ian view of preferred shares for a long time, admittedly not thinking too much about it own my own terms.

Graham described preferreds as being a hybrid between stocks and bonds, with the worst qualities of each. None of the profit potential of common stock, but none of the security and safety of the bond form.

I've just sort of eschewed them based on that.
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Re: focus on income in VP?

Post by Xan » Sun Sep 01, 2019 4:12 pm

I had an accounting professor in college who described preferred stocks as having a fancy name in order to take money from "less sophisticated investors".
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Re: focus on income in VP?

Post by Kbg » Sun Sep 01, 2019 5:41 pm

$1000 par

And yeah, I wouldn't put a huge percentage of one's portfolio in them.
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Re: focus on income in VP?

Post by gull1 » Mon Sep 02, 2019 9:13 am

This seems to make some sense to me. A bit riskier than treasuries (which I already am exposed to in PP) but with a little better yield. Is there a specific strategy to pursue to build a portfolio of agency bonds? Ladder them? Longest term? I did a quick look over at Fidelity secondary market, they show:

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ochotona wrote:
Sat Aug 31, 2019 8:35 am
Why not some Agency bonds or Mortgage Backed Securities? TVA, Federal Farm Credit, Federal Home Loan Bank, Government National Mortgage Association? AAA or AA+ rated, Government backed private corporations, pay more than Treasuries.
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Re: focus on income in VP?

Post by ochotona » Mon Sep 02, 2019 9:50 am

gull1 wrote:
Mon Sep 02, 2019 9:13 am
This seems to make some sense to me. A bit riskier than treasuries (which I already am exposed to in PP) but with a little better yield. Is there a specific strategy to pursue to build a portfolio of agency bonds? Ladder them? Longest term? I did a quick look over at Fidelity secondary market, they show:

Image

Image

Image

ochotona wrote:
Sat Aug 31, 2019 8:35 am
Why not some Agency bonds or Mortgage Backed Securities? TVA, Federal Farm Credit, Federal Home Loan Bank, Government National Mortgage Association? AAA or AA+ rated, Government backed private corporations, pay more than Treasuries.

I don't have a set strategy on how to use them. Ladder, barbell, coupon, no coupon, it all depends on your needs and wants. I was going to use them alongside Treasuries to provide extra yield on badly "sagged" parts of the yield curve.
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Re: focus on income in VP?

Post by gull1 » Mon Sep 02, 2019 11:10 am

ochotona wrote:
Mon Sep 02, 2019 9:50 am
I don't have a set strategy on how to use them. Ladder, barbell, coupon, no coupon, it all depends on your needs and wants. I was going to use them alongside Treasuries to provide extra yield on badly "sagged" parts of the yield curve.
Would you consider iShares AGZ? or does that get too watered down? I am still wrapping my head around the difference between owning the bonds outright to maturity where you get face value+coupon vs an ETF/fund of bonds where its more of a speculation that should have a similar net return but with varying interest/price depending on when sold?
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Re: focus on income in VP?

Post by dualstow » Mon Sep 02, 2019 2:01 pm

I have a mostly income-oriented vp:

- muni bond fund
- corporate bond fund
- dividend stocks. Not necessarily those with a massive payout ratio, but those that tend to keep paying, and to give shareholders a raise once a year). Pepsi, McDonald’s, Chevron, Microsoft, Lockheed...
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Re: focus on income in VP?

Post by ochotona » Mon Sep 02, 2019 6:27 pm

AGZ is OK, but duration too short. Only 4 years.
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Re: focus on income in VP?

Post by Kbg » Tue Sep 03, 2019 2:49 pm

gull1 wrote:
Mon Sep 02, 2019 11:10 am
I am still wrapping my head around the difference between owning the bonds outright to maturity where you get face value+coupon vs an ETF/fund of bonds where its more of a speculation that should have a similar net return but with varying interest/price depending on when sold?
This is fairly straight forward. "Funds" have a mandate and in the case of bond funds the mandate is usually focused on bond type and bond duration which you can almost always read in the fund's name. (e.g. ETF Symbol VGIT = Vanguard Intermediate Term Treasury Fund). Using VGIT as our example "intermediate" is normally defined as 7-10 years and treasuries are the bond type.

Accordingly, the bond fund's quoted price will vary based on supply/demand and interest rate movements for equivalent class bonds as new bonds in the class continue to be (newly) issued and all old bonds in the same class will immediately reprice to the new issue. You'll be able to see this in the daily quotes with ETFs being updated continuously throughout the trading day. Given a fund is purchasing and selling bonds continuously to stay within the mandate you end up with an average of sorts for the bonds in the fund's portfolio which then becomes the fund's "yield."

***IF*** you hold a bond to maturity then in nominal terms you get the coupon interest returned to you on the bond's distribution date and your principal back when the bond expires. In other words, there is zero doubt as to your nominal return and it "never" varies.

If you try to sell your individual bond before maturity then the same things impacting bond funds impact your bond only precisely so and it too will be constantly repriced on a daily basis in the secondary market.

Notionally, if you owned a bond right in the middle of a fund's "average" the "yield" should be reasonably close at a given point in time should you hold both until the bond expired (or more aligned to reality, you sold your bond when the fund sold its bond of the same type...as it will when the bond exits the fund's mandate duration).

At the 2% level it's way more complex, but the above covers 98% of the difference.

My personal approach. I buy individual treasuries (bills) for specific outlays I know are going to happen at a specific point in the future which is what large pensions (and others do). If I just want to collect interest I tend to go with funds as I know I can cash out efficiently with the click of a button. I could do this buying individual bonds on the secondary market but I figure between human mistakes, being a small DIY investor getting screwed on the spread vs. the fund's management fee that it's probably a draw and takes far less of my time which is worth something.
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