We eased out of traditional bonds and fixed income investments a while ago. They produce little or no return these days. They also don’t have a margin of safety, because interest rates near their historic lows are far more likely to rise than to fall, reports Bob Carlson, editor of Retirement Watch.
Traditional retirement income investments don’t pay enough income. They really haven’t for years. That’s why I created the Retirement Paycheck portfolio.
Over the years, we’ve earned above-average income plus some capital gains by rotating through investments such as preferred securities, high-yield bonds, master limited partnerships, high-dividend stocks and others.
We tactically move in and out of the investments because they are more volatile than traditional retirement income vehicles. We try to buy low and sell high.
Preferrred securities are one source of diversification and balance for us. They have high yields and usually are damaged less by interest rate increases than traditional bonds.
Cohen & Steers Preferred Securities & Income (CPXCX) has several advantages. It is actively managed, and the managers put capital preservation ahead of high yields. That allows the fund to avoid a number of low-quality securities that are in the preferred securities indexes.
The fund also has a global mandate. It can purchase a preferred security from any issuer in the world. That greatly expands the investment universe, allowing the fund more opportunities to earn higher yields without taking a lot of additional risk.
Cohen & Steers offers a number of different share classes for its open-end funds. The best share class for you depends on the broker or other method you use to invest. Review our May 2020 issue for details on selecting the share class for you. CPXCX is up 0.54% in the last four weeks, 3.98% over three months and 4.84% over 12 months. The yield recently was 4.31%.
We also own a combination of preferred securities and REITs in the closed-end fund Cohen & Steers REIT & Preferred Income (RNP). The fund is about equally split between the two kinds of investments. The recent yield was 6.83%, and the fund hasn’t made a return of capital distribution in the last two years.
RNP recently sold at a 5.88% discount to net asset value and has a six-month average discount of 8.89%. It uses about 24% leverage to increase income and gains.
The closed-end fund TCW Strategic Income (TSI) is allowed to own almost any fixed-income security in the world, but the portfolio is primarily focused on non-agency mortgage securities. These are securities backed by residential mortgages that aren’t insured by any of the government-associated agencies.
About 40% of the fund is in the non-agency mortgage securities. The rest of the portfolio is spread among the major U.S.-based fixed-income investments, such as high-yield bonds, corporate bonds, government bonds, commercial-backed mortgage securities and agency mortgage securities.
TSI doesn’t use leverage. Its performance slipped recently, primarily because the fund went from selling at a small premium to net asset value to selling at a discount. The recent discount was 4.44% which compares to a six-month average discount of 0.62%.
That means the fund’s investments have done better than its share price, and anyone purchasing now will buy the assets at a discount. The fund is down 1.43% over the last four weeks. But it is up 1.05% over three months and 2.47% over 12 months. The recent yield was 4.90%.