3 Asset Classes for Retirement Income

04/03/2015 10:00 am EST

Focus: ETFs

James Pearce

Director of Research, Investing Daily

Jim Pearce, director of portfolio strategy for Investing Daily, focuses on three asset classes in creating his model portfolio for retirees seeking above-average income. Here, he discusses MLPs, REITs, BDCs, and offers ETF suggestions for exposure to each of these sectors.

Steven Halpern: Joining us today is Jim Pierce, director of Portfolio Strategy for Investing Daily and chief investment strategist of Personal Finance, the company's flagship publication. How are you doing today, Jim?

Jim Pearce: I'm doing great Steve, how are you?

Steven Halpern: Very good. Thanks for taking the time. Today we are going to discuss your strategy for generating meaningful income in the current low interest rate environment.  First, can you give us a general overview of your new portfolio which you call Maximum Income for Retirees?

Jim Pearce: Sure, I would be happy to, Steve. I created the Maximum Income Portfolio about six months ago because we know that on average about 10,000 baby boomers are retiring every day and will continue to for the next several years.  

Many of them will need to be able to draw a much higher level of income from their retirement account then they can get from traditional fixed income sources such as treasury notes or bank CDs.  

With the S&P 500 currently paying an average yield of around 3%, I felt we needed to offer our readers something with a yield much greater than that and I'm proud to say that the Max Income portfolio right now has an average annual yield of over 7%.

Steven Halpern: Let's look a little deeper into the three asset classes that make up this portfolio.  First, you recommend Master Limited Partnerships.  Could you share your thoughts on this sector and why now would be a good time to buy in this area?

Jim Pearce: Yeah, I think, actually, now is a great time and here's why:  most MLPs are in the energy sector, which, as everyone knows, has been getting hammered lately since oil prices have dropped so much during the past six months.  

As a result, we feel now is an opportune time to buy into some of the higher quality MLPs that should be able to raise their distribution significantly once oil prices start climbing back up.  

That should also drive the unit prices of these MLPs higher, adding some capital appreciation potential to our portfolio as well.  

Steven Halpern: Next, you recommend real estate investment trusts or REITs. What's the attraction here and what specific characteristics are you looking for when you assess real estate investment trusts?

Jim Pearce: Sure. The attraction is there appears to be an imbalance between demand for housing in the United States and the supply.  


We look for diversification in terms of both geography and user type so our Maximum Income portfolio includes REITs that operate in both United States and Canada and offer both residential and commercial real estate.  

We also like REITs that are not locked into long-term fixed rate leases so they can raise their rents as inflation increases.  

Steven Halpern: Now the third asset class that you include in this portfolio is Business Development Companies or BDCs.  How do these fit an overall income portfolio?

Jim Pearce: Sure.  Well, you know, a lot of people don't really know what a BDC is, but you can think of it as sort of the little guy's way of participating in venture capital and private equity. The BDCs that we own make loans to small companies that are growing rapidly but can't get a conventional loan from a bank.  
The loans are a little riskier in that sense, and for that reason, we concentrate on BDCs that lend primarily to companies that are profitable and on the verge of being able to go public or pay off the loans from organic growth. It's a great way to also add a little upside potential to the portfolio.

Steven Halpern: Now, investors who are interested in this portfolio could follow all your individual recommendations within your portfolio as a subscriber, but you also offer ETF recommendations that provide a broad overview of each of these asset classes, which you have been kind enough to suggest you will share with our listeners. Could you walk us through the three asset classes that makeup the portfolio and perhaps explain how somebody could get exposure to each of these markets?

Jim Pearce: Sure. I would be happy to, and you're right, our individual holdings average about a half a percentage point more the year in yield and there's 12 of them, but if somebody wanted to make this really easy on themselves, they could buy just three ETFs-one in each of those three sectors-and still have an average yield well in excess of 7% and be very diversified.  

For REITs, I use the Mortgage Vectors Mortgage REIT ETF-the symbol is (MORT)-and that has a current distribution rate of almost 10%.  

For MLPs, I use the JPMorgan Alerian MLP Index ETF with a yield of just about 4% and for BDCs I use the Market Vectors BDC Income ETF with a yield of 8%. By the way, the JP Morgan MLP, that symbol is (AMJ) and for the BDC sector exchange traded fund, the symbol is (BIZD).  

When you combine those three funds, you are investing in over 100 companies with an average yield of about 7.3%, and because they are funds, they pay out regularly, you don't have to do anything other than sit back and collect a check.

I think that's the intelligent way to maximize income in the low interest rate environment we have been in and will most likely be in for the foreseeable future.

Steven Halpern: I appreciate your time today. Thank you so much for sharing your insights and letting our readers know about this new portfolio.  

Jim Pearce: Thank you very much, Steve.

Steven Halpern: Thanks.

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