Turning On The Income Part 2

Greetings! I trust that this will find you well and enjoying life.

Today I want to examine using different asset types that consistently generate interest or dividends to provide retirement income. Examples of these asset types are individual bonds, preferred stocks, real estate investment trust (REIT’s) and business development companies (BDC’s). The primary benefit of these approaches to generating income is the intention and hope of being able to maintain the principal value of the asset.

With a bond (corporate, government or municipal) if you buy it at par and hold it to maturity, you should be able to expect to receive what you paid for it; unless the issuer calls it prior to maturity and that’s always a possibility in certain interest rate environments. Anytime you buy a bond there is some level of risk of default, unless you purchase bonds issued by the US government which are backed by the taxing power of the US. The rate of interest paid is based on the demand of the bond and prevailing interest rates at the time of issue.

For the most part corporations issue either common or preferred stock. If a corporation pays a dividend, preferred share holders are eligible to receive it before a dividend is paid to common. Certain companies that are consumer staples like energy, food and healthcare; things consumers have to have, have histories of paying consistent dividends on their preferred stock and therefore dividends from these type companies are used by some for retirement income. By using dividends on preferred stock as an income generator, retirees have an opportunity to gain if the share price increases or conversely to lose if share prices decline. Dividend rates are based on profitability of the issuing company.

Income producing real estate is a common form of retirement income if either you directly participate as a landlord or indirectly as a share owner in a real-estate trust. Share owners in real estate trust leave the work of owning real-estate to others and split the earnings (rents) as a result. Interest income generated is predicated on rents paid on properties in the trust and the skills of the property managers and trust administrators. Real estate trust can be either public or nonpublic and in the case of non public are not liquid. REIT’s can be considered as retirement income generators and as a method to invest in commercial real-estate as an asset class for a portfolio.

Business Development Companies are non publicly business entities that put together and manage a portfolio of loans made to privately held companies. Investors pool their money and the BDC manages the loan portfolio for their benefit and provide the investor systematic consistent interest income payments. The structure of the BDC is such that during the subscription phase while the portfolio is being developed the investors shares are not liquid. When the subscription phase is completed and the BDC goes “public,” the investor can sell their shares if they choose.

Individual bonds, preferred stock, REITS and BDC’s are all commonly used for retirement income. A close examination of them should be done to understand the intricies to determine if they are right for you. Don’t hesitate to call if you would like additional information or feel that we can help with any aspect of your retirement plan.

Best regards,

Jeff Christian CFP, CRPC

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