We continue to look for ways to boost income and Lisa Springer from Street Authority looks into tax efficient income streams from three different sources. The three avenues she explored were:
1. Master Limited Partnerships (MLPs) have a track record for consistent growth, steady returns and high yields that are mostly tax-free. She likes three:
- Enbridge Energy (EEP) increased distributions 8%, and units currently yield 7%.
- Kinder Morgan (KMP) has posted 16 years of distribution gains, is guiding for 8% distribution growth this year and yields 5%.
- Terra Nitrogen (TNH) produces nitrogen fertilizer for farmers, nearly tripled distribution payments last year and yields 8%.
2. Real Estate Investment Trusts (REITs) pay no corporate taxes as long as they distribute the majority of profits (usually 90%) to shareholders. Three she likes:
- Nursing home operator National Health Investors (NHI) has posted 10 years of dividend growth and yields 5%.
- Universal Health Realty Income (UHT) has raised dividends 22 years in a row and has a 6% yield.
- Washington REIT (WRE) has a 39-year record of dividend growth and yields 6%.
3. Municipal Bond Funds are exempt from federal income taxes and also sometimes exempt from state taxes. Two she likes:
- PowerShares Insured National Muni Bond (PZA), which yields 4.3% and returned 19.4% last year,
- Market Vectors Long Municipal Index ETF (MLN), which yields 4.3% and returned 22.5%. In this case, we will substitute in a mutual fund which has longer history as a proxy (Evergreen High-Income Muni Bond EFHYX)
We will build these eight into a single collection and measure them against our dividend bearing ETF portfolio:
|Asset||Fund in this portfolio|
|REAL ESTATE||(ICF) iShares Cohen & Steers Realty Majors|
|FIXED INCOME||(TIP) iShares Barclays TIPS Bond|
|Emerging Market||(VWO) Vanguard Emerging Markets Stock ETF|
|US EQUITY||(DVY) iShares Dow Jones Select Dividend Index|
|US EQUITY||(VIG) Vanguard Dividend Appreciation ETF|
|INTERNATIONAL EQUITY||(IDV) iShares Dow Jones Intl Select Div Idx|
|High Yield Bond||(HYG) iShares iBoxx $ High Yield Corporate Bd|
|INTERNATIONAL BONDS||(EMB) iShares JPMorgan USD Emerg Markets Bond|
- Three Ways and Eight Picks to Get High Yields and Beat the Tax Man -- Total of $10K invested equally in each stock
- Retirement Income ETFs Tactical Asset Allocation Moderate -- Above funds using TAA (40% fixed income, 30% for each of the top two asset classes)
- Retirement Income ETFs Strategic Asset Allocation Moderate -- Above funds using SAA (40% fixed income, 12% for each of the five asset classes -- funds selected based on price momentum)
Portfolio Performance Comparison
|1Yr AR||1Yr Sharpe||3Yr AR||3Yr Sharpe||5Yr AR||5Yr Sharpe|
|Retirement Income ETFs Tactical Asset Allocation Moderate||-0%||-0%||22%||9%||78%||7%||59%|
|Retirement Income ETFs Strategic Asset Allocation Moderate||4%||2%||37%||17%||125%||2%||12%|
|Three Ways and Eight Picks to Get High Yields and Beat the Tax Man||8%||22%||117%||25%||150%|
This approach appeals to me for a number of reasons: You have three different types of assets that are likely to behave somewhat differently. I also like the focus on dividends for those needing short-term income. We can also see that the returns and risk adjusted returns are strong for as long as we have history. On the other hand these are different types of investments and it's important to understand their pros and cons before investing.
Three Month Chart One Year Chart Three Year Chart Five-Year Chart
As I review the five-year graphs, I like what I see. The volatility appears to be no worse than the diversified ETF portfolio. This is an interesting approach that is worth serious consideration. I need to study more about the limited partnerships but this says it may be worth the effort.
Disclaimer: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.