With fixed-income yields still exceptionally low, where should investors go to find income? The Wall Street Journal’s Jason Zweig says they may want to look no further than their own portfolios.
“Just as the removal of oxygen from a room can make you lightheaded, artificially low interest rates could make some income-oriented investors lose their ability to think clearly,” Zweig writes. “Those who want ample income must either wait patiently until rates finally rise — or must violate the rule of thumb that says you never should fund income needs by dipping into capital. Above all, you must be skeptical of anything that purports to offer high current yields.”
Zweig looks at closed-end funds that use “covered call options” to generate juicy-looking yields, but find some big dangers in the strategy. Instead, he says, investors looking for income should consider violating that unwritten rule about dipping into capital. “There is no logical reason why you can’t manufacture your own dividends, and that is probably what [many] investors should consider,” he writes. “Rather than taking income only from dividends or interest, you could selectively harvest gains from your stock portfolio.” He says this can be done by trimming “winners or the stocks you think are fully valued, [and] consulting your accountant to ensure those withdrawals will be taxed as long-term capital gains.” Withdraw 1% or less each quarter, and a diversified stock portfolio “should come within spitting distance of maintaining its value, after inflation, in the long run.”