Creating an Income Portfolio

Source: finance.kalpoint.com

Source: finance.kalpoint.com

Today (literally in the past week) – I’ve been setting aside a portion of funds to be invested directly in income producing securities.  The hope is to keep track of this portfolio over time – maybe compare it against other income mutual funds out there, find out effects as a result of rising rates, lessons of sustainable dividends, etc.

It’s been awhile since I posted but we’ll try to keep it more frequent (think I’ve said that five times in the past year).  Anyways, as some of you know, I’m an independent IT consultant and have a company that’s incorporated which pays me a salary (or distributes dividends) to pay for personal and family items – mortgage payments, car maintenance, utilities, food, and computer games.  We’ve recently made a decision to take less salary out of the company – using the money kept in the company to act as my retirement savings that I can draw on when I decide to no longer work.

With less salary, I’ve decided to create an “income portfolio” – although it’s really just stocks in my direct trading account – to provide some monthly and quarterly income to offset the salary I no longer am taking from the company.  Note, I am not trying to replace ALL the salary we’ve decided to keep in the company – but enough to provide some stable income stream to help pay the bills.

Now, I went on a dividend hunting craze 2-3 years ago, of which I documented what were 2 silly dividend mistakes (JPM preferred shares & AGNC). By income, I picked stocks that provide some monthly or quarterly distribution whether it be interest, an actual dividend, or return of capital (as is the case with some of the REITs).  And for fun (although “fun” is subjective with real money on the line), I’m going to track how much my income portfolio grows (or shrinks) along with the income I receive – and maybe a year from now, I will post dividend mistake #3 – or hopefully just some insights.

To keep things simple, I’m starting out with these 9 stocks (based on my current holdings) – and for illustration purposes, just showing what happens if I were to invest $10K into each one.  At some point, I might show how much income it is replacing – as Canada does have the dividend tax credit, which equates to dividends from a Canadian corporation being taxed at a significantly lower rate than if you received the same amount in interest or salary.

So, as of today, here’s what I’m going to consider my portfolio:

Income Portfolio - 26-Nov-13
As time progresses, I’ll add investments I feel that should be part of the portfolio – I’m currently trying to find some decent government/corporate bond investments to add t this mix.  This portfolio is semi-real and semi-make-believe: it is based on holdings we currently have.  However, some of these stocks I wouldn’t necessarily buy right now for its dividend (example – Royal Bank which we did buy for its dividend – but was $50 when we bought it with a 5% yield vs. the $70+ today and 3% yield).  To make it simpler to calculate, I also just assumed equal $10K investment in each – which is why there are odd numbers of shares – when making my own purchases, I would probably buy to the nearest 100.

If some folks are wondering why there are companies in my current holdings that produce dividends but are not in this portfolio –

  1. Those that are producing 2% or small yields, I’m likely owning them not directly because of their dividend but more-so for their growth potential (DGS has a great 3.28% yield right now for emerging markets, but that’s the primary reason for investing in it, not the dividend)
  2. REITs – We own specific REITs (DI.UN, RMM.UN, etc.) – to keep it simple, I’m just going to represent them all through the BMO Equal Weight REITs.  One interesting note on REITs – this will be the first time I have them in a non-registered account and unknown to many, the “dividend” received usually is classified as return of capital which is NOT eligible for the dividend tax credit – so I will get a tax lesson at the end of the year.
  3. BKE (which I have yet write about) – part of the investment thesis was that the company has issued out a “special dividend” 5 of the last 6 years.  The special dividend is part of the investment; but it’s also a great retailer to invest  in
  4.   2008 US Financial rebounds – AIG/BAC/etc. – these companies have started to pay dividends (although in the <1% yield range).  Ultimately, they could be return back to providing decent yields, but investment in these companies are more for the turnaround than the dividend.

So, let’s hope this isn’t dividend mistake #3 – I’ve tried to pick stable companies / ETFs with stable dividend history in the 4-5% range.  There are some that have me a little nervous (the XPF – which will lose in value as interest rates rise or if there is a notion that rates will rise) but as I said before, we’re really investing in this for the income they provide.

And given that I post maybe once a month (if that at all), updates to this portfolio can follow that same frequency (hopefully not). 😛

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5 thoughts on “Creating an Income Portfolio

  1. Not bad picks. I generally feel “sin” stocks as being good dividend plays, but half your readers will balk at buying them. You might want to consider some short term bonds, real return bonds or high yielding corporate bonds. Yes bonds will fall in price (taking a capital loss), but they are a staple of any income producing portfolio. In the long run, the falls don’t matter as much. Remember always DRIP your portfolio.

  2. Pingback: Income Portfolio Addition: Bonds (ZCS) | Fearless Cal's Investment Journal

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