For those investors who are near retirement or are already retired and seek high yield income to generate cash flow to support your financial needs during the decumulation phase of your investing life, a portfolio that compounds income each month may be of interest. That is the idea behind my Income Compounder portfolio, which uses a strategy of reinvesting monthly (and in some cases, quarterly) distributions to continually build a larger and growing income stream. For those who need to withdraw some of that income to help pay for living expenses, a partial reinvestment each month may be more appropriate, leaving some cash available to withdraw without the need to sell shares of your holdings to raise capital.
For example, my IC portfolio currently generates an average of about $6,000 per month (some months are more when the quarterly distributions are paid, some are less). But I only need to withdraw about $3,000 per month to help pay for my living expenses to supplement my other sources of income. That leaves about $3,000 per month that I can reinvest to buy more shares of my current holdings thereby increasing the future distributions from those holdings. This strategy benefits from the notion of compound interest.
I have been writing about my income compounder strategy on Seeking Alpha for a few years now, and recently my strategy has proven to be successful. I retired from my full-time career last summer and received a partial lump sum payout from my pension that I was able to invest during the market lows of September and October. My portfolio balance is up considerably since then, and my income has soared as I was able to purchase some very high yielding securities at very low prices.
Furthermore, by trimming some of those holdings to take profits and capture some realized gains from the increase in prices since the October lows, I have also rotated into some additional, even higher yielding ETFs in January of this year including four of the YieldMax ETFs: AMDY, AMZY, NVDY, TSLY; as well as three other high yield ETFs that use alternative income strategies: BITO, JEPY, and TLTW. In each case, I hold relatively small positions, each representing less than 2-3% of my total portfolio holdings. Also, the distributions are variable for each of those ETFs so the current annual yield shown for each is subject to change based on the distributions paid out in the future, which may be more or less than past distributions.
In my recent discussion of Four “unloved” high yield CEFs, I discussed how my approach to investing for income may not be suitable for all investors, depending on your own investment goals, risk tolerance, and income needs. More conservative investors who prefer to see a large balance on their monthly statements may not appreciate the fact that the income generated from higher yield holdings may not result in substantially higher portfolio balances in the short term. In other words, if you are still in accumulation mode and growing your portfolio balance, my IC strategy may not be your cup of tea.
One benefit to the IC portfolio strategy is that during bear markets, income is still coming in from your holdings without the need to sell shares at a loss. However, that is also a drawback during bull markets because the capital gains from income holdings are typically much less than the gains that can be realized from growth or value investments.
New High Yield ETFs Added in 2024
Due to my desire to keep growing my future income stream while limiting the risk, I currently hold over 50 different securities with no single position representing more than 3.5% of the total. I actively manage my portfolio and adjust my holdings as market conditions change. This year, I decided to add four of the YieldMax ETFs: AMDY, NVDY, AMZY, TSLY because the companies that I feel will benefit the most from the AI trend including AMD and Nvidia, along with two other companies that I feel are likely to outperform in 2024 including Amazon and Tesla, offer excellent income from the options trading strategies that those ETFs employ.
Not everyone agrees with me that those funds are good investments, and that is ok. If they don’t work out, I will adjust but for now they are all generating some substantial additional income. For example, even though TSLY is down in price to just $8.90 as of February 9, 2024, it has paid nearly $8 in distributions over the past 12 months. Also, I just initiated my position in TSLY before the most recent earnings announcement, which caused the price of Tesla to drop. Therefore, I believe that this ETF may have more upside ahead as the price of Tesla recovers over the next few months.
Likewise, I feel that a small position in a Bitcoin ETF makes sense given the recent SEC approval of those ETFs and I decided on BITO to leverage that trend. The BITO fund offers another source of income without the need to worry about buying Bitcoin when it is low and then selling some when it goes higher. I let the fund managers make those decisions for me and just collect whatever income the fund delivers. So far, I have small (unrealized) capital gain on BITO and the yield is approximately 15% based on what has been paid over the past 12 months, which is a variable monthly distribution.
My decision to add TLTW is due to what I believe is a bottom forming in the long-term Treasury market as evidenced by the chart of TLT. The TLTW options strategy generates a substantial income stream that currently yields close to 20%. This recent article goes into more detail on TLTW if you are interested in learning more about the specifics of that ETF. Technical analysis is not my strength but I have been reading price charts for many years and based on what the Fed is saying about interest rates potentially being reduced later this year it looks like a double bottom is forming on the TLT chart. That means (to me at least) there is likely to be more potential for upside price appreciation in the future than further downside pressure on 20-year Treasuries.
My 2024 Income Compounder Portfolio
Here is my total list of portfolio holdings, sorted by current market value as of 2/9/24.
The yield presented is what was calculated by either Schwab or Fidelity because I hold these positions in two separate IRA accounts with those two brokers. I highlighted in yellow the new (to my portfolio) high yield ETFs that I described above, and each of those is a variable distribution so the yield shown may be inaccurate going forward. I also hold a couple of positions that are either growth stocks or value stocks that I believe have strong long-term potential for price appreciation and some income generation (as in the case of Chevron). I also hold some cash and cash-like holdings such as SGOV.
I also hold a few other alternative types of income securities including some preferred shares and baby bonds (senior notes) that are somewhat speculative. These are special situations that I feel represent some unique current opportunities, but I would not recommend them to others unless you have a high risk tolerance and are willing to gamble a bit with some of your investments. These are non-core holdings, and I may decide to trade in or out of them depending on what happens in the broader market.
CLO Asset Class Forecast
I also try to avoid concentrating too much on any single asset class or sector such as BDCs or CLOs, although both of those asset classes performed very well in 2023 and I have built up large positions in both, but especially in CLO funds such as ECC, OXLC, CCIF, EIC, XFLT, OCCI and more recently, JBBB. I believe that CLOs are just hitting their stride in a sense and will continue to pay out large distributions in 2024 as credit risk remains low and yields remain high. If we suddenly start to see more defaults on large company loans and bankruptcies begin to pile up, then it might be time to start thinking about getting out of some of the riskier CLO funds.
For example, Fitch Ratings believes that loan defaults will begin to tick up in 2024 to a default rate of 3.5% to 4% later this year.
Fitch’s 2024 outlook for U.S. leveraged finance is deteriorating on the back of sustained tighter access to capital markets and higher for longer interest rates pressuring highly levered issuers.
VanEck, which offers the CLOI fund suggests that the rally in CLOs is likely to continue into 2024.
CLOs rallied strongly in December, ending 2023 with a 10.54% return. The current backdrop suggests CLOs are well positioned to start 2024.
Another insight from Lord Abbett suggests that higher credit quality CLOs will be the emphasis in 2024.
Given tighter monetary policy and less stringent underwriting standards over the last few years, we advise a cautious approach to floating-rate borrowers and the CLO market in 2024. We expect fundamentals to weaken and defaults to pick up in the medium term for bank loans, and for CLO managers to be net sellers of CCC-rated debt in the new year. In terms of technicals, we believe new issuance will remain low in the first half of 2024, while potentially picking up toward the end of the year.
Energy, Infrastructure and Utilities: Down but Not Out
Another macro trend that affects my portfolio selection criteria is the global trend of infrastructure investment that is growing but also suffering from high interest rates. The energy sector shows promise, especially in midstream (pipeline) assets that offer high yield returns for income investors.
Several of my recent additions or increases to existing holdings have been in energy, midstream assets, and infrastructure and utilities related assets, including USOI, Chevron (CVX) which I intend to hold for many years, and PBR.A (the preferred shares of Petrobras, the Brazilian energy company). I have been building long positions in several infrastructure/utility CEFs while the prices are beaten down and yields are up and some of those include SCD (recently switched from quarterly to monthly distributions), NXG, SRV, and ASGI.
Other similar funds that I like but do not currently own include UTF, UTG, and MEGI. I did hold Brookfield Real Assets Income Fund (RA) in my IC portfolio in 2023 but I sold it recently. That fund was one of my largest holdings until they slashed the distribution last summer causing the price to crash. I held the fund for a few months after the cut and even added some shares to lower my cost basis so when I sold, I was close to breakeven.
Although Brookfield is making huge investments in global infrastructure, I am not as comfortable holding the RA fund after my recent experience and with interest rates remaining higher for longer. Once interest rates do start to come down, it may be time to revisit.
Real Estate Trends
For the past few years, I have mostly avoided investing in REITs, although starting in November when the Fed first hinted that rates may start to come down in 2024, the real estate sector began to perk up. I currently only hold a couple of real estate sector holdings: EFC, which I wrote about recently, and IGR, which I covered back in November. While interest rates remain high the prospects for the real estate sector remain uncertain in my view and thus, I am cautious with respect to new investments until we get more clarity from the Fed later this year. Traditionally, REITs offer some diversification in one’s portfolio and offer a high yield source of income that is somewhat recession resistant.
While many REITs are currently trading at a discount to book value, it may be an opportunity to buy low before the news that rates are coming down causes prices to spike. One example of that potential opportunity is AGNC. Although they recently reported Q4 results that were better than expected, the continuation of higher interest rates for longer than some had hoped may cause the price of AGNC to drop further and could potentially lead to a dividend cut later this year. Therefore, I am avoiding AGNC for now but watching closely what happens over the next few months.
Other high yield mREITs that I am watching include DX (which I wrote about here) and NLY, which recently posted a Q4 earnings beat as their book value increased. However, with the Fed being “careful” about when to reduce rates, I feel it may still be too early to initiate new positions in any of the mREITs right now.
In my recent article that covered Four Unloved Ultra High Yield Funds, I explained some of the rationale behind my investing for income and why some funds that offer a steady, high yield distribution scare away some investors. In my constant quest to improve my future income stream, I may be willing to take on more risk because I can and because I feel that the higher reward is worth the extra level of risk involved. A few years ago, I referred to my approach as my “No Guts No Glory” portfolio but that was back when I was still in the accumulation phase of growing my portfolio balance and used swing trades to capture profits from growth stocks that I would then invest in income holdings.
Now that I am retired and collecting a pension and soon, Social Security, I am no longer as concerned with growing my portfolio balance as much as growing my income stream, hence the name change to my Income Compounder portfolio. After a 40+ year career working and collecting a paycheck, I am now ready to begin “decumulating” my assets by spending what I earned during my working years and am now fully enjoying my life. That means playing more tennis, skiing, traveling, going out to eat with my wife, and writing to share my experience with others in the hope that it will help enrich their lives.
I hope that I have achieved that last goal with this latest installment of my IC portfolio holdings and some explanation behind my reasoning. Thanks for reading, and please leave your comments in the comments section below if you have anything to add or share.