All is fair in love and war; however, income investing has different rules. Your income investing portfolio is just that—yours.
How you build your income investing portfolio is near and dear to your heart and your circumstances. But it is essential to look at the options at your disposal.
Today, I want to talk about two of my favorite types of income products: Preferred Shares and Mortgage REITs. I invest heavily in both of these products but for different reasons. Let’s begin.
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What are preferred shares? Preferred Shares fall into the equity stack of a business but function almost like bonds.
Preferred Shares differ from common shares because they have a par value and a call date. Because of this difference, it is challenging to find preferred shares if you don’t know where to look.
What are mortgage REITs? Mortgage Real Estate Investment Trusts (mREITs) invest mainly in bundled mortgage loans called mortgage-backed securities.
This business differs from Equity REITs, which own homes and apartments. Therefore, they are more like lenders than homeowners.
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Why compare the two? I am comparing these products because they are two of six income-investing products I purchase regularly. Sometimes, it is good to have direct comparisons, especially when starting as an investor.
What is your risk tolerance? Before becoming an income investor, you must consider your risk tolerance and risk profile.
If you can’t stand seeing your investments “in the red,” stay away from mortgage REITs. Mortgage REITs are highly sensitive to interest rates, which you cannot control or predict. Therefore, you have to be strong during tough times.
Preferred shares have a par value (typically $25), so you can quickly determine if you are purchasing at a price you love. For example, you can buy an AT&T (T) preferred share for $20 (a 20% discount).
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Let’s get started. What is the best type of security to purchase when beginning your income investing journey? The answer is easily Mortgage REITs.
Most of the starter brokerages (like STASH, Cash App) carry the big Mortgage REITs like AGNC (AGNC) and Annaly Capital (NLY).
You’ll need a large brokerage firm to purchase preferred shares. I purchase them in my Charles Schwab and Wells Fargo accounts.
Also, preferred shares do not allow you to purchase fractional shares. You must buy complete shares if you want to add to your position.
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When starting your portfolio, AGNC can give you a massive boost in your income. You may be in the red, but you will see 10 to 15% dividends coming in monthly. Adding a monthly payer is one of the keys to successful dividend investing and living off the income.
Searching for income. Mortgage REITs are easy to find; you just search for mREITs. However, finding high-quality picks will be a challenge.
It is tough to find preferred shares because they hide in plain sight. Many large corporations offer preferred shares, including J.P. Morgan (JPM), AT&T (T), Public Storage (PSA), and Bank of America (BAC).
However, each preferred share has its own stock ticker (i.e., PSA.P), so you will need to do some hunting to find their preferred shares. I like to search by reading articles on Seeking Alpha and Preferred Stock Channel.
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Most people can barely find index funds, let alone preferred shares. Therefore, I refer them only to advanced stock users.
Purchasing for the long term. Preferred shares have a shelf life. Most can keep trading past their call date, but it is always looming.
I wouldn’t recommend having a portfolio of only preferred shares because they could all expire. The good part is that companies redeem them at par value. If you purchase AT&T (T) preferred shares at $20, the company will pay you $25—providing a nice capital gain.
Holding mREITs long-term can be risky because they are cyclical. This means they typically follow the interest rate super cycle.
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Generally, when the Federal Reserve sets interest rates low (below 2%), people will flock towards higher-yielding fixed income such as mortgage-backed securities and corporate bonds.
That means prices of these securities will rise, and yields will fall. For example, I bought AGNC in 2021 for $18. Interest rates were zero percent.
Today, with interest rates at 5%, AGNC trades at $10. However, this means that AGNC yields over 14%.
I don’t mind holding AGNC long term because I understand the super cycle. However, next time AGNC prices increase, I will avoid purchasing more. Perhaps I may even trim some of my positions to buy some other higher-yield products.
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The magic of income investing. All this is to say, “Your income; your way.” Preferred shares are like gift cards; you’ll know when you get a good deal. Everything is out in the open.
Mortgage REITs are like paychecks. You’ll have some good and bad months, but I am happy as long as the income keeps flowing.
The magic of income investing is that you are creating one big paycheck that will help supplement your retirement.
I have roughly $20,000 in mortgage REITs that pay me a handsome sum every month or quarter. I use preferred shares as more of an exotic investment.
When I see a preferred share on sale, it’s like being at Walmart. I make the purchase and reap the benefits for the next five years.
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However, I cannot depend on finding a reasonable price on preferred shares all the time. It’s easier for me to keep purchasing Mortgage REITs every month.
Conclusion. That’s why I have a much larger allocation toward mortgage REITs; it’s simply easier to find and purchase them.
As my portfolio grows, I can set aside money just to purchase preferred shares on sale. I can then go on a shopping spree every so often.
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You can sometimes find preferred shares that pay qualified dividends. Most REITs pay non-qualified dividends, which means you’ll pay at your ordinary tax rate.
I love both of these securities. They both are for advanced investors who have time to research the company’s finances and future.
When I help young income investors, I always point them toward AGNC. It’s good to see the price fluctuate but also collect the income. Focus on the income, and you will slowly free yourself from the workforce. 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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