Receiving Income from Investments

A few week’s ago Bill Gross, PIMCO's "bond king," said his $236 billion Total Return Fund no longer holds any U.S. Treasurys. Selling his position was a gutsy business decision, one for which he may take some heat, but from an investment standpoint he was right. Not owning U.S. Treasurys now is a no-brainer.

I won't go so far as to say there was or is a "bubble" (think tulip bulbs and dot-com stocks) in the Treasury market, because holders know exactly what they will receive at maturity and there is no risk if they simply hold on. Bond funds, however, do not mature, so investors have risks holders of individual issues do not. For example, those who bought the iShares U.S. Treasury ETF (TLT) last August have already lost 17 percent. They'll lose more.

I, too, am avoiding U.S. Treasurys in my Reduced Risk Income portfolio. There are better vehicles with higher yields. Specifically, preferred stocks, emerging market debt funds and high yielding equities make more sense.

Preferred stocks represent an equity investment in a company, as do common shares, but rank higher in the corporate pecking order when it comes to dividends or assets (in bankruptcy). Like bonds they pay dividends regularly with yields for many today of approximately seven percent. They are primarily income vehicles, so there will be little if any price appreciation. One of our favorites the JP Morgan Chase 7% Capital Securities Series J.

Emerging market debt funds invest in bonds from less-developed countries. Their bonds have lower credit ratings than other sovereign debt, because of the increased political and economic risks. As a result, they reward investors with a higher yield and capital gains potential. The asset class is attractive now because emerging economies are growing faster than those in the developed world. You can invest through several ETFs. PowerShares Emerging Markets Debt (PCY) and Western Asset Emerging Markets Debt (ESD) are two. I like the latter, which yields seven percent.

When you think of high yielding equities utility stocks often come to mind. Utility stocks have lagged the market the past year, but investors have been rewarded with yields of four or five percent and dividend growth. Some consider utilities a safe haven and to some extent that is true. Most are monopolies with a guaranteed return on capital. That is not to say they are risk free. If interest rates rise their yields will be less attractive, so their prices will fall. Many are also heavy borrowers. Rising rates will raise their costs. The Select Sector Utility SPDR (XLU) is a good way to invest. It owns all the utilities in the S&P 500 Index.

Other equities have high yields as well. Many drug stocks have been out of favor and have yields as high as utilities. My favorite is Pfizer (PFE).

All income vehicles have risks, some specific to them and others common to all. Among the latter, the most important is the level of interest rates. When rates are rising more than a little, income vehicles give ground (the reverse happens when they fall). While that day is coming, it's not coming soon...except for U.S. Treasurys. I agree with Bill Gross. For income investors there are better places to be.

— David Vomund is an Incline Village-based Registered Investment Adviser. Information on his money management service is found at www.ETFportfolios.net or by calling 775-832-8555. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.