Income Funds and Risk
Ask most investment professionals and they will tell you that funds with high dividend payouts are risky or unstable. An emotional marketing sales pitch will soon follow that will move you in the direction of funds they claim are a safer place for you to invest you capital. Often, there will be some powerful and emotional statements used to show you how their people have some secret insider knowledge that they use to beat the S and P 500 index. I want to turn their risky emotional marketing upside down. Below are the reasons I believe high yield funds should be a small part of everybody's financial plan.
I want income Now. I want to put some capital at risk now and get a return every single month. This can easily be done with a fund such as ARR. The fund pays out annual dividends close to 20% on a monthly basis. The Fund announces payout dates three months in advance. The fund has a very predictable history and has been stable. Now, would I draw money off my credit cards or not pay a debt to buy this fund? No! However, if I had a little extra money one month, I would see this as a great way to start to build some portfolio income.
There is zero chance that if I invest some of my money into a typical growth or index mutual fund that I will get a monthly payout that is taxed at the current low rate of dividends. The biggest risk with typical mutual funds is that my share value may drop or rise. The dividend income I receive with income funds can drop or rise as can the share value. The more I educate myself about the funds, the less difference I see in the level of risk. Many income funds such as the Alpine funds AOD or AGD track large indexes and still manage to pay an annual dividend of over 10% on a monthly basis. Again, the dividends are announced three months in advance.
When I go to yahoo finance and study the charts of the income funds, they seem to be almost identical to the S and P 500 charts... except for the big monthly dividends I get. Another example is the fund IGD. It cost about $11 per share and pays $.10 per month which is 11% annual return. Many of the big mutual fund companies are now starting to introduce similar income products. The markets will rise and fall, but over time, most securities move in the same direction at the same time. I would rather be getting a large cash dividend monthly so I can buy more shares or use the money to invest in my happiness!
Most truly wealthy people do not have any debt, and they live off the money that their money makes. They do not work for money. Therefore, if I start to use my capital to create income which I use for my expense, I am acting like a wealthy person. I believe if you start the pattern you can make it grow, but if you invest nothing in creating some current income, you will always have nothing. I choose to do some investing in income which I know will rise and fall with the economy.
Risk is tempered with education. Short term investing is not a risky concept. It is a viable plan to take some of your capital and invest it in high yielding funds that pay monthly dividends. The income can then be used to offset expense, reduce debt, or reduce the amount of money you draw out of a retirement plan. I believe it is very risky to focus on income from a job with no other diversification. We could all increase our financial security by investing some money into quality funds that pay a high monthly dividend. Exploring this idea of current income could add another layer of protection between you and Murphy!