INVESTING NOW FOR INCOME -- WITHOUT LOSING YOUR PRINCIPAL March, - - PowerPoint PPT Presentation

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INVESTING NOW FOR INCOME -- WITHOUT LOSING YOUR PRINCIPAL March, - - PowerPoint PPT Presentation

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INVESTING NOW FOR INCOME -- WITHOUT LOSING YOUR PRINCIPAL March, 2010 Donald Cassidy President, Retirement Investing Institute www. R-i-i. org DISCLAIMER Neither the speaker nor the Retirement Investing Institute (R-i-i.org) make individual

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SLIDE 1

INVESTING NOW FOR INCOME -- WITHOUT LOSING YOUR PRINCIPAL

March, 2010 Donald Cassidy President, Retirement Investing Institute

  • www. R-i-i. org
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SLIDE 2

DISCLAIMER

Neither the speaker nor the Retirement Investing Institute (R-i-i.org) make individual investment

  • recommendations. The speaker holds no
  • licenses. Each security and strategy should be

considered in light of the investor’s overall situation including risk tolerance. Securities mentioned today are EXAMPLES only. Do your own homework!

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SLIDE 3

“The Dawn of Sales”

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SLIDE 4

NUMBER-ONE RULE

NEVER BE SOLD ANYTHING !!

  • Bernie Madoff
  • Allen Stanford
  • Local confidence

scams everywhere !

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SLIDE 5

THE BEST SINGLE INVESTMENT

  • A PHONE-ANSWERING MACHINE (!)

– NOT the costly monthly phone-co service!

  • TOTALLY KEEPS SALESPEOPLE AWAY
  • ( 800-289-9999 to check out brokers )
  • www.donotcall.gov/register/reg.aspx
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SLIDE 6

“NEVER BE SOLD ANYTHING” = PART OF GENERAL CAUTION

  • Yield Sells, so…
  • Brokers Push What’s

Easy to Sell You, so…

  • Don’t buy anything offering high yield, and…
  • Do your own work; use a DISCOUNT broker
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SLIDE 7

BUYING STOCK IS NOT A MARRIAGE VOW!

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SLIDE 8

THINGS CHANGE !

  • So our portfolios must NOT stay constant

as collections from the past!

  • Especially important to recognize this

when we’ve experienced past comfort from regular income payments. They are NOT guaranteed into the future !

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SLIDE 9

“Things CHANGE !”

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SLIDE 10

BASIC RULES FOR STAYING OUT OF TROUBLE

  • DO NOT stretch for higher yield
  • Believe the directors’ dividend message
  • NOTHING is forever
  • CDs are NOT a better choice

than UST Bonds/Notes/Bills !

  • Be Counter-intuitive and Skeptical
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SLIDE 11

“Junk” Bonds

  • Called that for a reason!
  • The market is not totally stupid:

do NOT reach for yield !

  • Good only in Short Time Windows ( ~ 1 year in 5 )
  • Lipper Study: 20 years: +20 bps vs. UST
  • This is NOT a B & H Investment
  • Already too LATE in this Economic Cycle

– Defaults are a lagging indicator; Prices HAVE bounced!

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SLIDE 12

THE UGLY SECRET OF JUNK-BOND FUNDS

  • PM stretches for high (risky) yield
  • PM locks in losses when bonds default
  • 98% of funds lost principal – through 2006!
  • MORAL OF STORY:

Run the other way !!

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SLIDE 13

“Preferreds” that are Bonds

  • Generally AVOID these street-mfd

products -- QUIDS, TOPRS, PINES, CORTS etc etc

  • Trick Provisions
  • “Yields” are heavily return of capital
  • Very Tax-Inefficient
  • CHECK STATUS @ QuantumOnline.com
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SLIDE 14

Good Online Sources

  • Preferreds: www.QuantumOnline.com
  • MLPs: www.NAPTP.org
  • REITs: www.NAREIT.com
  • Closed-ends: www.CEFconnect.com
  • Dividend History: www.bigcharts.com
  • clicks: Advanced Chart; Rolling Dividend
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SLIDE 15

ASSET ALLOCATION ?

  • Asset LO-cation !!
  • Bonds, REITs in IRAs
  • FOR NOW, Q-Div Stocks in Taxable a/c
  • IF have loss carry-fwd, write options in

taxable a/c to speed up using it !

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SLIDE 16

QUALITY IS JOB ONE IN 2010 !

Adopt Ford’s ?-New (internal) Slogan: SURVIVAL is job one. Don’t Neglect some UST bonds

  • r the ‘TLT’ and ‘TIP’ ETFs
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SLIDE 17

SCENARIOS

  • Inflation
  • NO-flation
  • Deflation / Severe Econ. Distress
  • ? Stagflation
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SLIDE 18

Source: The Complete Investor

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SLIDE 19

INFLATION IN 2009, 2010 ?

  • ZERO (so says Washington) for 2009
  • So much for projecting trends
  • Inflation WILL return unless we have a

depression

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SLIDE 20

INFLATION STRATEGY

  • Some TIPs. Why Risk Vanilla Treasuries??
  • A LITTLE in Munis (upper tax rates to rise)
  • Protect vs. Inflation as possible…

– MLPs with rising distributions – Royalty Trusts (ditto) (but, now?) – Utilities (ditto) – Equity REITs (ditto) – The ETF “UDN” and maybe FXI, FXC, FXF

  • HIGH-QUALITY Preferreds if still at Discounts
  • AVOID JUNK BONDS (high risk)
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SLIDE 21

DEFLATION STRATEGY

  • U.S. Treasury L-T Bonds (TLT)
  • NOT TIPs
  • AAA Muni GO’s
  • Maybe the ETF: UUP
  • Corporate Securities:

– Low/No debt leverage – Think SURVIVAL (new mind-set!) – Companies not dependent on raising prices

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SLIDE 22

TOXIC Ideas

  • High-Yield Bonds and Funds
  • Bank Loan Funds (a.k.a ‘prime rate’)
  • Any utility or REIT not raising its dividend
  • Exotic ‘Preferreds’ with acronym names

(PINES, CORTS, QUIDS, TOPRS, etc)

  • REITs / Utilities with incredible yields
  • ALL leveraged Closed-End Funds
  • Big-Pharma names with 5%+ yields
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SLIDE 23

Good Dividend History

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SLIDE 24

SIX CYCLE STAGES for UTILITY, REIT, and MLP DIVIDENDS

  • Acceleration
  • Steady Growth
  • Decelerating Growth
  • Zero Change
  • Decrease
  • Omission
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SLIDE 25

IMPLICATIONS OF SIX STAGES

  • Acceleration

+

  • Steady Growth

+

  • Decelerating Growth
  • early warning
  • Zero Change
  • urgent
  • Decrease
  • and late!
  • Omission

+ (!) Usually

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SLIDE 26

Common Problem for Wall Street’s Orphans: Aftermarket Support Absent !

  • Master Ltd. Partnerships
  • Preferred Stocks
  • Royalty Trusts
  • Closed-End Funds

– Hint: possibly opportunities!

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SLIDE 27

HIGH CORRELATION !

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SLIDE 28

OBSERVATION:

  • In 2008 and early 2009, price action in

preferred stocks was totally illogical (they moved down while same companies’ common stocks rose!). This was due to lack of aftermarket support and provided a huge opportunity for the brave. Making money requires having courage when market is scary, and exercising prudent discretion when market is lots of fun.

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SLIDE 29

Common vs. Preferred !

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SLIDE 30

THE NEW ELEPHANT…

  • IRS Revenue Procedure 08-68
  • “Elective Stock Dividends”
  • Be Very Careful; call

the REIT and Ask!

  • and 09-15 re CEFs!
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SLIDE 31

AREAS OF INTEREST

  • U.S.T. Bonds via the “TLT” ETF
  • Utilities
  • REITs
  • REIT Preferreds
  • MLPs
  • Royalty Trusts (when inflation re-starts)
  • Banks & qualified pfds – not over par!

VERY SELECTIVELY

  • Other
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SLIDE 32

Covered-Call Writing

  • IYR: Jun (19) 48s $1.10 (13+ weeks)

– Feb.16, with IYR @ $44.40 (EST Yield = 4.5%): – Mar (20) 46s $0.61 (5 weeks) – ? Annualize return (!) IF OPTION EXPIRES – Take the cap gain IF OPTION EXERCISED

  • Requires no return to panic over RE
  • Get Stock’s Yield + Added Income from Options

– Example ONLY. Not a specific recommendation.

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SLIDE 33

WRITING CALLS

  • Know “the Greeks” ?
  • No, Know the CHARTS !

(K-I-S-S principle)

  • Always Know When X-D Date Is !!
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SLIDE 34

BIG CAUTION RE OPTIONS

  • Be a WRITER/SELLER, not a Buyer
  • Per CBOE, about 80-85% expire worthless
  • IGNORE seminars

about getting rich quick in options !

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SLIDE 35

FPL’s Dividend Pattern

25-Feb-09 $0.4725 25-Nov-08 $ 0.445 27-Aug-08 $ 0.445 4-Jun-08 $ 0.445 27-Feb-08 $ 0.445 28-Nov-07 $ 0.41 29-Aug-07 $ 0.41 6-Jun-07 $ 0.41 28-Feb-07 $ 0.41 24 Nov-06 $ 0.375 23-Aug-06 $ 0.375 7-Jun-06 $ 0.375 3-Mar-06 $ 0.375 22-Nov-05 $ 0.355

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SLIDE 36

Writing Calls on FPL Group

  • Feb. 16: Stock trading @ $46.10
  • Yield 4.3% (on new $2.00 annual div rate)
  • Jun 50s $0.75 (17+ weeks)

annualizes to $2.25 (another 4.9%)

– Example ONLY. Not a specific recommendation.

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SLIDE 37

PNW ? Directors Know!!

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SLIDE 38

LONG-Term Look @ PNW

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SLIDE 39

Unisource: 2 Differences CLEAR !

(regular annual div rises, stock is UP six years net)

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SLIDE 40

YOUR CHOICE

  • Higher Current Yield, no growth, lower quality, no

signal from directors; thus higher risk

  • Lower Current Yield, grow income and capital,

higher quality, annual signal from directors; thus lower risk of surprise

  • A COMMON STOCK WITHOUT DIVIDEND GROWTH

IS LIKE A WEAK BOND, BUT WITH MUCH LOWER STATUS AND NO CONTRACTUAL OBLIGATION !

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SLIDE 41

BOND INTEREST, WITHOUT PRICE RISK* !

  • Buy BOTH ETFs: TLT and TBT

– Get Interest on the TLT

  • Write O-O-M Options on Both

*- Enter buys at collar prices for TLT, TBT

  • Feb 16: TLT yield 4.31% @ 90.36

– Mar (19) 92s $0.50 (for 4.5 weeks)

  • (the 2x) TBT no yield @ 48.56

– Jun (19) 54s @ $1.22 (17+ weeks) – Example ONLY. Not a specific recommendation.

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SLIDE 42

SOME IDEAS TO CHECK OUT ( DO YOUR OWN HOMEWORK! )

  • TLT and sell covered calls (also TBT as hedge)
  • Utilities: CTL* OKE* nst** te* xel* se* d* ?fpl* uns**
  • REITs: OHI* nly* iyr* uht hpt*
  • REIT Pfds

BREPRC maaprh PSAPRKorM ohiprd nlypra hiwprb hcpprf ofcprj udrprg hptprc

  • MLPs

BPL** or EEQ** or BWP* apu** mwe*

  • Royalty Trusts PEYUF pbt* sbr
  • Banks BAC* BACPRI wfc* usb* (usbprl too hi)
  • Other BHP* DO* hthpra rgc** imkta metprb

svu* swy* cvs* pff** fcj x* * optionable; ** optionable, but options often thin

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SLIDE 43

Order Entry

  • Pfds are THIN. ALWAYS use Limits.
  • MLPs often similar. Ditto Royalty Trusts.
  • Always check quote and size! Look at

recent daily ranges on chart.

  • Be a bit patient. No need to own today!
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SLIDE 44

FINAL THOUGHTS

  • Don’t Stretch for Yield (High Risk!)
  • Don’t Buy a Dividend ! (dumb tax-wise)
  • Do Write Options (out-of-the-money

strikes)

  • Diversify Themes (since outlook murky)
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SLIDE 45

Why Be Watchful ?

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SLIDE 46

ONE MORE THOUGHT…

Don’t Buy & Hope!

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SLIDE 47

Happier Investing !

  • www. R-i-i. org