How to find investment income for retired clients

Koch cites several examples of the regional banks to which his research has led him. St. Louis, Mo.-based Pulaski Bank (PULB) trades around $11 per share (all stats as of mid-July), slightly above book value, with a dividend yield of about 3.4 percent. Brookline Bank (BRKL) outside Boston is a $9 stock with a book value of $8.80 and a dividend yield of 3.7 percent. Another stock Koch has been buying is Northwest Bancshares (NWBI). It’s a larger institution with about $79 billion of assets; it trades slightly above book value at a $13 per share and has a 3.9 percent dividend yield. “If you can buy maybe 10 to 15 of these in a market basket with the yield-income perspective, it’s been a very attractive portfolio construction asset class for my clients,” he says.

Going hybrid

Bonds and stocks are not the only income-generating assets that your retired clients, especially those with higher net worth, might consider. Devin B. Pope, CFP, with Albion Financial Group in Salt Lake City, Utah, says that his firm has expanded its roster of income investments to include hybrids that have characteristics of both bonds and stocks. Examples include master limited partnerships (MLPs) that own oil and gas pipelines, preferred stocks, and floating rate bank loans. Other assets the firm considers include publicly traded real estate investment trusts (REITs) and business development companies (BDCs). In addition to providing higher yields, these holdings can increase portfolio diversification. The investments’ return can be volatile in the short term, but clients willing to hold them for the long term are more likely to earn the expected returns.

Albion Financial Group also uses these hybrids for its wealthier clients through a private equity fund of funds. Albion started offering these funds to accredited clients around 2005, Pope explains. The firm serves as a limited partner, collecting money from its participating clients and then investing in roughly half a dozen different private equity funds. The Albion Income Fund, the firm’s third fund of funds, invests with private equity managers that focus on yield-producing investments. Yields are higher on the private equity side, he says, and the fund has a goal of paying 8 percent to investors from its positions in MLPs, revenue loan companies and BDCs.

Lending to strangers

Here’s a novel investment strategy: making uncollateralized loans to strangers over the Internet. It may sound far-fetched, but that’s the basic idea behind peer-to-peer (P2P) lending companies such as Lending Club and Prosper. Investors willing to act as lenders provide funds; borrowers apply for loans that are priced based on the loan’s term and an assessment of the borrower’s creditworthiness. The lenders claim that their technologies allow them to offer credit at lower costs than traditional banks, and they share the returns with investing lenders.

When Jeffery Nauta, CFA, CFP, with Henrickson Nauta Wealth Advisors in Belmont, Mich., first learned of P2P lending from a client, his response was “lukewarm at best,” he says. After examining the lenders’ businesses and the technology platforms, however, his interest in P2P loans as a possible investment for clients grew. His firm now works with a hedge fund for qualified investors that invests in loans originated on Lending Club and Prosper. The yields are approximately 10 percent annually with very little deviation, he says.

Expanding the horizons

Many U.S.-based investors limit their income search to U.S. corporate or government securities. That domestic bias is understandable, both from the perspective of sticking to what’s familiar and a desire to avoid the additional risks of fluctuating currencies and unstable foreign politics. But it’s a shortsighted approach. Although the U.S. financial markets are very large, investing in foreign securities can provide attractive risk-adjusted yields and add portfolio diversification.

That’s the idea behind the Schroder Global Multi-Asset Income Fund (SGMNX), which launched June 23, 2014. According to Iain Cunningham, CFA, the fund’s manager, the fund’s goal is to deliver a real annual distribution rate of about 5 percent to investors and a total return of about 7 percent, with the distribution growing over time.

The fund plans to invest across multiple asset classes and national markets to accomplish that goal. The emphasis is on flexibility—the fund isn’t tied to an asset class, a benchmark or a national market. “We’ll invest anywhere in the world that we can find opportunities, we’ll invest directly and we’ll invest across all asset classes,” Cunningham explains. “We’ll invest across some 20 asset classes such as equities, all the fixed income asset classes you can think of from municipal bonds, emerging market debt, high-yield debt, convertibles, preferred shares and we’re doing that on a global basis.”

That approach exposes investors to an expanded range of both returns and risks, but Cunningham believes the fund’s strategy can help offset the potential risks. “By diversifying across lots of different asset classes, by diversifying across a lot of different securities, we’re hoping or seeking to diversify all the specific risks associated with those different things,” he says. “And, as we do that, we’re to lower the amount of risk that those investors are exposed to whilst maintaining the same level of yield that they can get from higher risk.”