The income products you purchase go a long way toward your happiness during retirement. We feel much better when we make solid purchases at great prices.
Today, we will discuss two distinct types of income products that can generate strong cash flow. Using these securities together can help us target safe income streams while giving us some forced capital gains.
Welcome back to the Retiring on Dividends series (101, 102, 103, 104), where we focus on income so that we can focus on what’s important.
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Why income investing? Why now? To stay ahead of inflation, we must achieve 10% annual income via dividends. This applies to low-inflation years (1%) and high-inflation years (8%).
The key to keeping your income stream compounding is building it early in your life. This strategy goes against the popular narrative to focus on growth vehicles during your youth.
One of the reasons income investing is so extraordinary is that you can use the income during your everyday life—no matter your age.
As a growth investor (index funds, growth stocks), you must create a separate account (emergency fund) to buffer your stock portfolio.
Income investors can solve their problems with income, and two vital products to their success are business development companies and preferred shares.
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Business Development Companies during retirement. Business development companies (BDCs) offer high yields and some growth. You also follow their Net Asset Value (NAV) to see if you can purchase for a premium or a discount.
I love BDCs because they pay out most of their profits as dividends. BDCs assist small businesses with financing and strategy. Sometimes, they can even take equity stakes in some companies.
When a BDC is flush with cash from operations or equity, it can pay us a special or supplemental dividend in addition to its standard dividend.
BDCs also offer slow and consistent growth. It’s challenging for them to grow because they pay so much in dividends; however, as they gain more clients and offer more loans, their NAV will grow, allowing the share price to appreciate over time.
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Some of my favorite BDCs are Ares Capital (ARCC), FS KKR Capital (FSK), Blue Owl Capital (OBDC), and Capital Southwest Corporation (CSWC). There are many more BDCs with outstanding track records during bull and bear markets.
My preference for preferred shares. I love preferred shares and baby bonds because you instantly know whether you are getting a good deal.
The goal of investing in preferred shares is to purchase at low prices, collect high yields for many years, and wait for the company to buy back your preferred at par value.
Let’s say you purchase Public Storage Preferred P (PSA.P) for $16. The par value is $25, and you purchase it at a 36% discount. You still collect the full dividends until the company calls it. Public Storage will eventually pay you $25 for their preferred share.
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If you can do this long enough, you will create wealth and property. Preferred shares and baby bonds are great during retirement because you are not playing guessing games.
You do not wait for the company to increase the divided payment. You simply purchase preferred shares and baby bonds, and if you want more income, you purchase even more shares.
Preferred shares and baby bonds fall into the “fixed income” category. If you purchase preferred shares from solid companies, they are as reliable as bonds (and easier to buy and sell).
Building a good portfolio of preferred shares can take time because you want to purchase them on sale. Therefore, you should start early and stagger their call dates.
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Using preferred shares and BDCs together. If you are starting an income-investing portfolio from scratch, you’ll want to purchase BDCs first.
When you purchase BDCs, your primary concern isn’t getting a massive discount but investing in solid companies with significant histories. You can also find great young BDCs like Trinity Capital (TRIN) that may offer you a chance to get in on the ground floor.
Once you have a few BDCs that pay over 10% yields, you can focus on adding baby bonds and preferred shares. Preferred shares are good gap fillers for quiet months with a few dividend payments.
The goal of income investing is to provide you with tons of paychecks that can assist you throughout the adventure of life.
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When you add preferred shares and BDCs to closed-end funds and mortgage REITs, you get a bigger picture of how the world of money works.
Preferred shares offer a way to temporarily invest in a strong company without buying common shares. Let’s take AT&T (T), for example.
AT&T has had a rough few years since they split off Warner Brother Discovery (WBD) and reduced the dividend.
If you held common shares, you would have been taken for a ride (like me). However, owners of preferred shares had a much less bumpy ride. Because their preferred shares stay calm, they can focus on other areas of their portfolio.
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BDCs also have memorable moments. During higher interest rate environments, BDCs can shine because most of their loans to small businesses are floating rates.
Floating-rate loans adjust their interest payments depending on prevailing interest rates. As the Federal Reserve raised rates from 2% to 5.5% in 2022 and 2023, these floating-rate loans caused more income to flow into our pockets.
As a retiree (and before), you want steady income from preferred shares and baby bonds and the ability to earn outsized returns from BDCs.
Conclusion. Business Development Companies and Preferred Shares give us the financial security we desperately need during retirement (and before).
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Most people need help understanding or even knowing about these products. That’s good for savvy investors who want high yields and forced capital gains.
As a retiree, your number one goal is income. Protection of capital will always be a thought in your head, but you can’t let that affect your investing habits.
Always have a fully funded emergency fund, which prevents you from tapping into investments and income. Once you have a fully funded emergency fund, it’s time to get your hands dirty with income products.
Each product has its own set of pros and cons, but the idea is to use them together to extract what we need from the markets.
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We need consistent fixed income we can leverage to pay expenses, save for the future, reinvest in more income, and have fun.
Preferred shares allow us to invest in companies for the low price of $25 per share. We can read the prospectus of each preferred share and baby bond to familiarize ourselves with its details.
Business development companies will surprise you. Sometimes, you will have massive capital gains or a special dividend. The key is to invest and let them handle the work for you.
I have been retired for one year and still love receiving income from preferred shares, baby bonds, and business development companies. They handle all the work while I sleep at night—as it should be. Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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