Market Turbulence Creates Opportunity For IRA Investors

by: Steven Bavaria

Most IRA investors' natural inclination during turbulent market periods like this might be to keep their heads low and do nothing. But volatile times actually present unique opportunities to IRA investors who don't have to worry about the tax impact of short-term versus long-term gains or other market timing issues that investors in ordinary taxable accounts have to be concerned about.

My goal, as an IRA investor, is to maximize the cash income stream from my portfolio over time, so the entire portfolio will compound - tax-deferred - at as high a rate as possible. This means focusing on both (1) the amount of current cash income (i.e. the yield), and (2) the anticipated future growth rate in that income stream (i.e. the dividend growth rate). I am looking to grow my overall portfolio at a rate of 7-8%. Last year I achieved a 7.8% annual return, of which 7.5% came from coupon income, meaning I was hardly dependent at all on capital growth. This year, based on annualizing the first five months results through May 30, I am on track to earn 7.61%, most of it coupon income once again. (Had I written this article a month ago, based on the first 4 months results, the projected earnings for the year would have been much higher. This helps to demonstrate the point of my article, that focusing on current income in an IRA is the best long term strategy, and sure allows you to sleep better at night.)

I look for a mixture of assets, some of which I consider my "fixed income" investments where the yield is high enough that I am satisfied to receive it at its current level indefinitely, with no expectation of growth; and the other part I consider my "growth income" assets, where I accept a slightly lower current yield with the expectation of continuous future growth in that yield. I have discussed this overall philosophy in previous articles.

Some examples of "fixed income" and "growth income" investments among my current holdings, are:

Growth Income Holdings
Duff & Phelps Global Utility Income Fund (NYSE:DPG) 5.99%
Royal Dutch Shell (RDS/B) 5.28%
Seadrill (NYSE:SDRL) 8.61%
Reaves Utility Income Fund (NYSEMKT:UTG) 5.85%
TransCanada Corp. (NYSE:TRP) 4.25%
SPDR Utilities ETF (NYSEARCA:XLU) 3.87%
Fixed Income Holdings
Vanguard Hi-Yld Corporate Bond Fund (MUTF:VWEAX) 6.84%
Third Avenue Focused Credit Fund (MUTF:TFCVX) 7.45%
Nuveen Credit Strategies Income Fund (NYSE:JQC) 8.75%
Pimco Income Oppty Fund (NYSE:PKO) 8.62%
Eaton Vance Limited Duration Fund (NYSEMKT:EVV) 7.78%
ING Prime Rate Fund (NYSE:PPR) 6.62%
Annaly Mortgage (NYSE:NLY) 14.14%
Windstream (NASDAQ:WIN) 10.64%
Click to enlarge

I maintain a constant list of approved "candidate" holdings and frequently move from one to the other as the market makes one or the other more relatively expensive or cheap than the other. Good examples are the two utility closed end funds - Duff & Phelps Global Utility Income and Reaves Utility Income . Both allow me to invest in a wide range of utilities, obtain a small bit of leverage (which is an advantage of many closed-end funds in this ultra low rate environment), enjoy a current yield of just under 6%, and have the modest but steady potential growth profile that utilities present. Earlier this year I noticed that UTG had risen to a substantial premium over its net asset value, whereas DPG, with a similar risk/reward profile, was still selling at a considerable discount. So I decided to take some of my profit in UTG and move into DPG. Then recently UTG fell a bit and was selling at par or a slight discount so I moved some money back into it. A similar situation occurred in the floating rate loan asset class, where a number of funds rose to where they were selling at premiums and it seemed a good time to take some profits and look for other opportunities. I soon found one in Nuveen Credit Strategies income , which is a loan fund but was selling at a higher discount and paying a higher distribution because it was going through a transition period and the market didn't fully understand what was happening with it. Nuveen, its manager/sponsor, had decided to convert a multi-asset income fund into a loan fund, but the price was down - and discount up - during the transition period while ownership shuffled around and the market became used to the new investment strategy. At an income yield of 7.2% and the hedge against inflation and rising interest rates that floating rate loan funds provide, I think JQC is still a buy. (Thanks to another Seeking Alpha author for putting me on to this.)

My goal, as stated earlier, is to (1) maximize the size of the income stream these investments produce, and (2) to grow that stream modestly over time. I am partial toward current income that is collected and compounds today rather than assets that produce little income today but promise a bigger payoff in the future. My reason for that is as much psychological as it is financial. If the market turns negative and my assets are actually dropping in market value for a spell, I find it a lot easier to "stick to my guns" and hold on if the assets are churning out a healthy earnings stream. For example, currently my entire portfolio has a weighted average yield of 6.8%. With a healthy yield like that, pumping out steady cash income every month, it becomes easier to be philosophical about market downdrafts. In fact, if - like most IRA investors - you are investing for the longer term and have not started withdrawals yet, then downdrafts in the market are beneficial because you get to re-invest your dividends at a better return than if the market were rising. (See "Learning to love corrections …")

Disclosure: I am long DPG, UTG, JQC, RDS.B, SDRL, TRP, PKO, EVV, PPR, NLY, WIN.