Investors often forget that long-term capital gains can be an additional source of income in a diversified portfolio.
For starters, this CNBC article suggests the following as sources of income: (1) High Yield Bonds, (2) Covered Call Options, and (3) Master Limited Partnerships. We like all three as part of a diversified portfolio, but they all have their own unique risks. For example:
The prices of high-yield bonds can be more volatile, and if you have to cash them in before they mature, you risk doing so at severely deflated prices. Not to mention they have a higher risk of default whereby you may not get all of your money back.
As noted in the CNBC article, covered call options (a strategy whereby you sell call options on stocks you own) can generate some extra income for you from the premium on the calls, but you also run the risk of missing out on big upside gains because your calls get executed and you sell the stock for less than it’s worth.
MLP’s (Master Limited Partnerships) are also a fine investment known for their very high dividend yields (they’re required by law to pay out a large portion of their income). However, we hate to see investors concentrate much more than 10% of their assets in this type of investment because they miss out on important diversification and expose themselves to more risk than they need to. Plus you have to deal with all the K-1's at tax time.
Lastly, we like capital gains as another source of income. Retirement can last a long time, and having long-term exposure to the stock market gives investors an important source of capital appreciation. Generating income by occasionally selling some of your winners isn’t a bad idea, especially considering this strategy is generally taxed at the same rate as qualified dividends anyway.
Our Blue Harbinger STOCKS strategy is designed to generate smart long-term gains via price appreciation (and it has a decent dividend yield too).