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A Refresher Course On The Income Factory Strategy

Jan. 05, 2022 12:37 PM ETAVK, ECC, ETG, GHY, JHI, LGI, OBDC, OXLC, PGP, RVT, UTF, UTG105 Comments

Summary

  • Our Income Factory® strategy evolved through a long series of articles here on Seeking Alpha, culminating in a book, a Marketplace service and more than 12,000 followers.
  • But the ideas are pretty simple, and represent a strategy that is an alternative, not a competitor, of traditional growth-based strategies.
  • Many investors find that getting most or all of their total return in cash they can re-invest to create their own growth, helps them sleep better through market turmoil.
  • Here's a quick summary of the entire Income Factory strategy - the "Cliff Notes" - and some practical investment ideas for getting started.
  • I do much more than just articles at Inside the Income Factory: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »
Money Trap

wildpixel/iStock via Getty Images

The Income Factory® is just a cute name I came up with over the past decade to describe a way of thinking about investing that actually goes back centuries, but seemed to have gotten lost recently as "growth" and "market price" became the primary

I launched Inside the Income Factory because many of my 12,000 followers and readers of The Income Factory® (McGraw-Hill, 2020) asked for more interactive dialogue. Here's what members say: 

  • "Learned the hard way how exceptional Steven Bavaria and the Income Factory is"
  • "Eternally grateful"
  • "His investment approach and superior record are literally an 'open book' "
  • "Allowed us to hop off the roller coaster"
  • "Steven is where I make my money"
  • "Worth every penny"

Readers who try us seem to like us, as we're in the top 5% of trial subscriptions that convert to paid. Click here to learn more.

Thanks,

Steve Bavaria


This article was written by

Steven Bavaria profile picture
14.46K Followers

Steven Bavaria has 50 years of credit, investing, journalism, and investing experience and is a graduate of New England School of Law. His Income Factory® philosophy, outlined in his book “The Income Factory”, is a disciplined strategy meant to maximize cash income with peace of mind in all market environments.

Steven leads Inside the Income Factory investing group service where hundreds of subscribers learn and implement this strategy alongside him. The Income Factory is built through portfolios of a variety of high-yielding securities. Growth is created by reinvesting and compounding the river of cash, so that income continues to grow through all sorts of markets - up, down, or sideways. Other features include a chat room and education content so you can learn alongside others. Learn more.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of ALL THE FUNDS MENTIONED either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (105)

T
Great article. I am exactly your audience, as I sell on emotions on the way down, and go all in at the top. When I first saw your articles a few years ago, I changed my approach and it's been a winner. (Although I choose my own funds.) Plus, I get the concept of an income factory, as I've owned my own business for decades.

I thought an interesting experiment would be to run a sample portfolio through Portfolio Visualizer, to see how it would have compared to simply holding an S&P index fund, and against a popular BDC, like ARCC.
I used 10 of the funds listed above, at 10 percent each. I dropped UGH, as it was similar to UFT, and I dropped ORCC as it is too new. Each fund then had a 10% allocation.
The look-back period starts Jan. 2015, because that's when ECC started. I started with $100,000 in all the examples.

Results from Jan. 2015 through Dec. 2021:
Current value of each $100,000 portfolio, without withdrawals, but reinvesting the dividends:
S&P: $263,421
ARCC: $264,189
Income factory: $203,652

Current value of each $100,000 portfolio, taking $500 a month out for living expenses, reinvesting remaining dividends:
S&P: $178,270
ARCC: $182,375
Income factory: $130,935

Current value of each $100,000 portfolio, taking out $500 a month, and using $30,000 of margin cash:
S&P: $221,259
ARCC: $225,803
Income factory: $156,892

In all three examples, the drawdowns on the ARCC and the Income Factory portfolio were about double that of the S&P portfolio.

A couple of lessons (for me) here:
1) It still matters which funds are picked for the Income Factory.
2) While dividends would ease concerns during drawdowns, it would still take an iron stomach to hold on. Yet, all portfolios recovered nicely.
3) As much as some writers knock going on margin, margin does increase total returns.

This test was constrained by the starting period of ECC. Other periods would have different results, just like the future will be different from the past.
Steven Bavaria profile picture
@Tennis bum
Exactly right. Like all investment strategies, it depends on what investments you select to execute it, the time period, etc.
O
Thanks for the refresher. I have been following for a few years and employ your methodology for the ETF rotation part of my portfolio. I have found the sector calls to be quite sound.
R
Hi Steven....thank you for this interesting article. As a retiree, I spend a portion of my dividends, however, I have started trying the Income Factory approach with PSLDX, a fund I know you have commented on. I initiated my position in August and reinvested all of the dividends and capital gains since. However, I am currently about $8k underwater based on PSLDX's price. Should I be concerned? I am already tempted to stop reinvesting the next quarter's dividends.
Steven Bavaria profile picture
@RetiredinIndy PSLDX is NOT a typical Income Factory investment. But I bought it primarily because of the great articles about it by @LeftBanker and others, as well as its great record and the top-flight PIMCO managers who run it. I have seen my investment in it go up and down just in the few months I have held it, but that does not surprise me. I'm in it for the long term.
Veritas1010 profile picture
Very interesting article.

I might add $DNP too though it has a greater premium (NAV), 37 years uninterrupted distributions is hard to argue with.

I too own $UTG, $UTF and am admittedly new to the CEF world. I know you mentioned your own CEF or ETF I think you are correct having Business Development Companies (BDC’s) like possibly $ARCC. I have just started to follow Owl Rock ($ORCC) too.

You also employ some good analogies here and get back to Rule of 72 which reminds me of the adage: “The simple and familiar hold the secrets of the complex and unknown.”― Edward B. Burger.

Thank you again.

disc.: long $UTG, $UTF, $DNP.
rfied112 profile picture
No mention of CEF fees. Nor the tax paid on the removed dividends...in Ira or taxable account...
l
@rfied112 come on, fees are needed to pay management and to implement their strategy... if you don't want to pay fees, you will have to do the work yourself!
As far as taxes are concerned, we all hate them...but they do pay DoD etc,etc,etc,etc,etc
Mili21 profile picture
@rfied112
In CEF world, your returns are after paying the fees.
Taxes are part of your investment process (unless held in ROTH) and very specific to individual situation.
Hoisan profile picture
@rfied112 there are a number of CEFs which have a tax advantage. These CEFs have distributions that are not taxed because of ROC. Before you question ROC go to sources describing the difference between good and bad ROC.
g
I noted in reviewing all the listed funds that in Seeking Alpha listings there is no data on the net asset value or dicount/premium listed. Other writers indicate this as a factor of investing in a cef. This information is obtained from other sources.
g
Steven Bavaria profile picture
@genuseugene It's a big factor. Try CEF Connect , which is great for screening and coming up with lists of funds by asset class and other differentiating performance and other data; and CEF Data, which is really good for accurate, up-to-date info on individual funds.
Jdavis4982 profile picture
Great example to share. I am a subscriber and love my portfolio. I do the income light factory. I enjoy Dividend growth with the income factory CEF you suggest. I love the service. I love watching my dividends grow from month to month. I still get some capital appreciation and I get a growing river of dividends each month that I get to choose to reinvest in CEF or in to stocks that grow their dividend. I like you approach as we are free to choose. I also like you provide us with your real time portfolio trades and your thoughts going forward. I used to have a 3.2% portfolio yield and after a few changes I now have a 6.1% yield. Best of both worlds!

2020 and 2021 have made me a believer in this method. In 2020 when I watched the CEF drop in NAV I was unsure but the dividends kept coming in buying the CEF at a huge discount. As 2020 rolled on the dividends bought more of the CEF and the dividends grew quicker. As the CEF price appreciated so did my gains. It made a believer out of me. Now I split my dividends to buy dividend growth stocks and CEF’s.

Thanks for the a great book, service, and your leadership!
j
Always looking for steven’s posts.
g
i will be passing on my individual stocks to heirs that have no desire to learn about investing so an income factory etf would be very interesting to me. i am sure there are many more like me.
w
PGP's share price has dropped steadily over time and so has its dividend, many cuts. I'm surprised you are touting that one. I can't argue with the concept, but what if the "income" needs to be spent as the name implies, and cannot be reinvested? I assume that that is the end game.
Steven Bavaria profile picture
@wwn2001 Obviously "total return" is the ultimate end game. It is merely a question whether you are more comfortable receiving it mostly in cash (i.e. an Income Factory approach) or in more of a growth strategy (low cash dividends and greater reliance on market appreciation). Neither is necessarily better. it is essentially a question of which approach gives a particular investor the comfort level needed to "stay the course."

Whichever strategy one chooses, then there is the totally separate question of which assets to select to execute the particular strategy. A lot of commenters get confused (and confuse other readers) by criticizing one strategy or another because they may not agree with some of the examples given of assets one might choose to execute it. Two separate issues.

Re PGP, it's PIMCO's best performing closed end fund over quite a few years, on a NAV basis. Which is why it now represents a good opportunity, having finally dropped down to reasonable price levels. Those who were foolish/stupid/unlucky (pick your adjective) to buy it at the nosebleed premium levels it sold at for many years (100%+ premium) obviously lost their shirts as the price dropped down to its current almost-par price. But the underlying performance of the portfolio managers has been terrific and anyone who buys it now gets that talent (Alfred T. Murata, Daniel J. Ivascyn, Pimco's top guys) working for them at virtually no premium, with a record (at NAV) of 14% and 16% annualized returns over the past 5 and 10 years, respectively.
Think. Focus. Health. Wealth profile picture
@Steven Bavaria as you say TR is the end game so it is not an either or decision.

Re " it is essentially a question of >>which approach gives a particular investor the comfort level needed to "stay the course."
>>Whichever strategy one chooses, then there is the totally separate question of which assets to select to execute the particular strategy."

One can have a portfolio of both income holdings and growth stock/etf holdings . Example: Hold USA cef and VUG etf....one can trim some (not all shares) VUG shares for income if needed or not...USA mgmt team does the exact same thing with its top 10 holdings to pay some of the distro...see any high yield stocks in their top 10...nope all growth stocks with low yields/dividends
Steven Bavaria profile picture
@learning to be patient with mr mkt
Exactly. As I said in another comment, I've never claimed the Income Strategy is a BETTER strategy than dividend growth investing ("DGI") or indexing or other growth-oriented strategies. I had to fight for years with Seeking Alpha writers and readers just to get the Income Factory accepted as a legitimate alternative. All those folks who'd been raised on traditional investment methodologies who insisted you had to have growth stocks and who didn't understand how reinvestment and compounding worked.
Now that the Income Factory has finally been largely accepted as a legitimate alternative, lots of readers and commenters still have a PREFERENCE for one strategy or another, which is fine. The key is to pick a strategy and then stick to it.
A common problem is that so many people, in their attempts to BEAT the market average, through market timing, hedging, etc., actually end up doing WORSE than the average. The Income Factory's main goal is to help the average investor NOT do that by making it easier to stick to the program even when markets are volatile.
bprinc11 profile picture
bought and red your book income factory, enjoyed.
Damon Judd profile picture
Was not aware of RVT total return of 10.5% since inception. Need to look at adding that one to my portfolio. Thanks!
Think. Focus. Health. Wealth profile picture
@EnigmaDude
a benchmark comp

RVT VTI Growth of $10,000.00
With Dividends Reinvested
Click for detailed chart tool
Start date: 06/15/2001 06/15/2001
End date: 01/04/2022 01/04/2022
Start price/share: $14.62 $55.67
End price/share: $19.56 $242.51
Starting shares: 683.99 179.63
Ending shares: 3,508.53 259.35
Dividends reinvested/share: $23.97 $33.38
Total return: 586.27% 528.94%
>>Average Annual Total Return: 9.82% 9.35%
Starting investment: $10,000.00 $10,000.00
>>Ending investment: $68,677.05 $62,877.77
Years: 20.57 20.57
m1chael profile picture
Loved the article. You do a better job than I of explaining my own investing strategy.

We do differ in our positions. I’m long ABBV, ARCC, ENB, LEG, MAIN, MO, O, PM, PRU, SACH, UNM, WPC, to name a few. YOC is almost 8%.
e
What has hurt me is when you sell and at
some time you will either have short term or long term
tax situation. The one that hurts is the gain sale and
the return of capital comes back to bite you. Lowered cost
basis and really a killer if held for years. I think many forget this
all too often. REIT'S can be one and well I know it. Another is
if in a living trust. Husband dies and widow is entitled to income from it.
the return of capital will not be paid to her as not income. Also if a
uncaptured section 1250 gain she is not entitled to it. I found this out as
I am the survivor of my late wife's trust. Again REIT'S this also. It was a rude awakening to find this out from my CPA. Since them have found what I get
to spend in many cases is not the % return we see as the dividend. Now
say that trust has held the stocks for a period of time and need more
spendable income and go to sell, here comes the tax problem again
of ROP and adjusted cost basis. Might check with your lawyer on how
to word the trust to prevent this? If only we can find in advance the breakdown
of the dividend payment before we buy. Hope this helps and saves you
some tax pain or net dividend surprises. I know this from experience.
Ed M
a
@emerritt WOW! Thanks foir sharing that one! I just saw it!
R
@emerritt
Unintended consequences…
Ouch.
Those are important to know.
I wonder if a will would have eliminated all those problems?
Or perhaps, splitting the tax bombs into a trust and leaving the simple stocks outright in a will?
Sounds like a tax lawyer is needed to add to the CPA, trust attorney stack.
Thank you for sharing what occurred to you.
@Steven Bavaria Thanks for the good summary of the strategy. I follow a similar strategy, but a hybrid where parts of the portfolio have relatively high and stable fixed income (e.g. a couple of CEFs and some preferred stocks), while other parts are more of a dividend growth play, including a couple of dividend growth ETFs, MLPs, REITs, and BDCs.

I think one of the concerns/questions that people have about the Income Factory approach is that it tends to focus on relatively high-yield investments which are perceived to be risky. I went back and looked at what happened to the income produced by the securities you listed and found that 7 of the 12 had substantial decreases in distributions over the last 10-12 years:
- in 2009 ETG had a 28.6% reduction in income,
- in 2020 OXLC had a 50% reduction in income and another big cut in 2017,
- PGP has had a steady decline in distributions since 2015 from $0.18 to 0.07,
- RVT had a pretty significant decline in distributions from 2017 to early 2021,
- ECC had a 60% decline in distributions in 2020,
- ORCC had a 74% reduction in distribution in 2020 for a couple of months although now it is back to the prior distribution level,
- GHY had a 34% reduction from 2015 through 2018.

So, although I agree with your overall strategy and philosophy, I'm not sure that anyone could call these picks "low risk" if they keep their eyes on the "river of cash coming in". Someone seeing a 30-75% reduction in income might be just as tempted to bail out of the securities as someone who sees a 30-75% reduction in market price. The "river of cash" is not so comforting when the water level drops precipitously. It seems to me that your article should address that issue explicitly, and perhaps pick other securities that have a better track record of steady payments through crisis years. I'm interested to hear your thoughts.
Think. Focus. Health. Wealth profile picture
@5992321 in Stevens june 15,2020 article what you describe was realized and covered in the first 4 paragraphs

seekingalpha.com/...

Lots of ways to TR and each person needs to decide on how much income and how much growth is required to meet their specific goals. A ker variable is how much can be reinvested for further productivity and how much is required to live on ( zero or some reinvestment)
Steven Bavaria profile picture
@5992321
Anyone holding a well-diversified portfolio like the model portfolios of my Inside the Income Factory service or the model portfolios included in my book, would not be seeing a "30% to 75%" reduction in income, even when some of the funds cut their distributions.

OXLC, for example, which decreased its distribution during the Covid crash, still managed annualized total returns of 11.4% and 13.5% for the past 5 and 10 years respectively, which is more than a long-term equity level of return, and certainly pulls its weight in anyone's Income Factory.

RVT, which you also mention, again has a stellar record: annualized total returns of 15.4% for 5 years, 13.6% for the past 10 years, and 10.5% going all the way back to 1986. So again, a holding most investors, Income Factory strategy or traditional growth strategy, would be thrilled to have had in their portfolios.
@Steven Bavaria I don't disagree that on average they might have had good total returns over the past 5 years (although that might have been driven by declining interest rates and consequent price increases in the CEFs which is unlikely to repeat in the next 5 years). But my question was whether investors would be so sanguine while looking at their river of cash declining as you suggest that they would be. I don't know how diversified a portfolio you are talking about (I'm not a member of your service), but you suggested 12 securities in your article. That is a decent number of CEFs that are themselves somewhat diversified. So, across those 12 securities you suggested, if someone held that portfolio in equal weights what level of decline in income would the investor have experienced in 2009 or 2015-2018, or 2020? Or for your portfolios, what levels of declines in income did they experience over those periods. Again, I'm not talking about average total return over a 5 or 10-year period. I'm talking about the actual "river of cash" that the portfolio produced in a given year?
Think. Focus. Health. Wealth profile picture
@Steven Bavaria how has your own portfolio or the Income Factory model portfolio fared re TR since 2015 (just random pick, no significants) vs thse to etfs?

VUG VTI Growth of $10,000.00
With Dividends Reinvested
Click for detailed chart tool
Start date: 01/02/2015 01/02/2015
End date: 01/04/2022 01/04/2022
Start price/share: $104.25 $105.92
End price/share: $319.19 $242.51
Starting shares: 95.92 94.41
Ending shares: 103.47 107.17
Dividends reinvested/share: $11.28 $17.83
Total return: 230.26% 159.90%
>>Average Annual Total Return: 18.58% 14.59%
Starting investment: $10,000.00 $10,000.00
Ending investment: $33,028.68 $25,982.16
Years: 7.01 7.01
Steven Bavaria profile picture
@learning to be patient with mr mkt
I don't know. An Income Factory is designed to provide steady equity return levels over decades, so it makes no sense to compare it to particular investments over short, cherry-picked periods. Per the Vanguard website, VUG has an annualized return of about 12% since inception in 2004, VTI has an annualized total return of about 9% since inception in 2001. So an Income Factory, depending on how conservative a risk/reward profile you select, should provide about the same range of return over a long period of time.
Any of them, VUG, VTI or an Income Factory, should provide a very satisfactory return over one's investment lifetime. The question then becomes one of comfort level for the investor, as I explain in the article. Which strategy will allow the investor to stick with it through thick and thin? There is no one answer for everyone.
Think. Focus. Health. Wealth profile picture
@Steven Bavaria ok I thought you used to publish your annual TR results
scarp1952 profile picture
@Steven Bavaria Well said. Everyone must seek their personal level of comfort. I have a significant minority of my portfolio devoted to income and I’m quite happy with what it delivers using CEF funds and a few dividend stocks like MO, etc. the balance I have is in plain old vanilla index funds. As we all know growth has been phenomenal for a few decades minus the corrections and dips. I would lose sleep however if I tried to time when to sell out of my index funds for cash. You never know when you might have to unload at a market low or get out when things are just suddenly taking off. In my just completed annual review I noticed if I had to have dumped VTSAX shares in early 2021 I or my heirs would have missed out on tremendous appreciation. If I had then put the money back in at mid year it would only have had about eight percent growth. The income portfolio solves that problem for me though I doubt at the end they will have as much total growth due to management expense and the outsized distribution payouts however it want miss by too much.
R
It appears to me you don't take in to account any tax implications, especially if held in a taxable account. When you deduct federal and state taxes on that income, doesn't it shred your analysis of doubling every 7 or 8 years?
Steven Bavaria profile picture
@RPapirner That's true. An Income Factory works best in a deferred tax account, like an IRA, as do most investments for that matter. But our taxable model, within our Inside the Income Factory service, still beats, even after taxes, a portfolio made up of the highest yielding municipal bond closed-end funds.
NV_GARY profile picture
@Steven Bavaria
I think reader deserve to know your results for the last few years. And numbers with taking out half, and the effect on following years would be good too.
thx
scarp1952 profile picture
Happy New Year Steven. Your investment style and recommendations mirrors what I’ve been doing for about twelve years now. I’m retired now and collecting distributions and dividends. It has worked great and I don’t have to sell shares at in opportune times. My account values continue to grow despite collecting the dividends. Since I’m traveling little I’m accumulating quite a bit which I intend to reinvest when we get a correction or large dip. I did reinvest my special distributions as a partial inflation hedge. I look forward to your upcoming writing. Thanks
rickevantodd profile picture
To keep it simple, this was an exceptional article!
darehabber profile picture
Thanks Steve!
Had a long talk with a buddy of mine about maxing out I-Bonds for the near term…..hard to argue with. I will forward this article to him for his consideration….he is very much philosophically aligned.
Ironically, as a real estate investor / operator of 25 years, all my “peers” considered me a “cash-flow” man….. I could never separate myself from the notion that:
Cash flow = freedom
Now in retirement, I’ve landed in the same place.
Correct thinking is correct thinking!!
Regards,
Howard
gardesign profile picture
@darehabber

Cash flow = freedom

And what better than to have a cash flow that requires no painting, repairs, or renters!
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