Building an Income Portfolio Part 2: More Stock Ideas, More Caveats

In part one of this article, we reviewed three common misconceptions about building an income portfolio and we provided five specific stock ideas. In the second installment, we provide more stock ideas and more caveats for investors to consider when building an income portfolio.

Invest for the Long-Term:

Even though you may be more focused on income instead of capital appreciation, it still makes sense for income investors to invest for the long-term. This mean not chasing the daily ups and downs of the market, but rather holding your investments for many years because the income it generates and the capital gains it experiences will both help create income for you in your retirement. Additionally, investing for the long-term helps you avoid many of the expensive hidden transaction costs that are prevalent throughout the industry.

Minimize Costs:

Minimizing cost is perhaps one of the most often underappreciated aspects of investing. Whether it be trading costs (e.g. exchange fees, bid-ask spreads, poor market timing), commissions (broker fees, sales charges, servicing payments), trading costs add up fast and compound over time. And as an income-focused investor, any money you can save by trading less is more money you have to spend later.

For added perspective, one of the core tenets of Blue Harbinger is to help investors avoid the high costs, hidden fees and conflicts of interest that are prevalent throughout the industry. For example, not everyone needs a full-service financial advisor (aka stock broker), especially considering all of the transparent and non-transparent fees that exist (e.g. 5% sales charges, management fees, 12b-1 fees, and unnecessary trading costs, to name a few). Also, most investors would be better off avoiding mutual funds because they tend to charge very high fees. For example, they often take 1-2% percent of your money each year (for management fees), and most of them underperform over the long-term because they are over-diversified (i.e. they are "closet index funds" with inappropriately high fees and hidden trading costs). Additionally, many investment advisors are simply not able to act in your best interest because of inherent conflicts of interest. For example, their arms are often being twisted by special interest groups to invest your money in a certain way. Also, many of them are simply acting in their own best interest, not yours. 


Understand your Investments:

At Blue Harbinger, our rule of thumb is that if we don't understand the investment, we don't invest.  Regarding stocks, we need to understand how the company makes money, and we need to believe in the business going forward before we invest.  This same rigorous analysis applies to ETFs.  We need to understand what the ETF actually holds (all securities in a market or just a sample, derivatives), does it trade at a daily premium or discount to its net asset value, and what fees are being assessed, to name a few.  Blue Harbinger subscribers have access to all of our research reports and updates.

Valuation Matters:

Understanding valuation is critical when actively selecting stocks.  Just because we like a business doesn’t mean it is a good investment.  Discounted cash flow analysis, earnings growth forecasts, and peer benchmarking are examples of important valuation inputs to help us identify attractively priced investments.

And with regards to selecting attractive investments, we have highlighted four opportunities (below) that we believe are worth considering when constructing an income-focused portfolio.


Welltower Inc (Yield 4.5%)

Welltower is a big dividend healthcare REIT, and it is an income-investor favorite not only because of its big dividend (especially compared to artificially low interest rates set by central bankers), but also because of the perceived long-term demographic tailwinds at its back. For example, you can read the investor presentation of just about any healthcare REIT and quickly get the message that the aging population will fuel healthcare growth. For example, this recent Welltower presentation titled “The Aging Population” provides the following useful chart about the significant expected growth in Welltower’s markets. 

We also like Welltower because the stock price has pulled back slightly over the last month making for a more attractive entry point in our view. Additionally, Welltower is priced attractively from a price to funds from operations (FFO) standpoint as shown in the following chart:

For more information on Welltower, you can read our recent full report here…


Wells Fargo & Co (Yield 3.0%)

Wells Fargo (WFC) is a relatively safe, big-dividend (3.0%), bank that we like within the constructs of an income portfolio. For starters, this bank is a much safer investment following all the new regulatory requirements that came out after the financial crisis, yet Well Fargo (like other big banks) is still largely hated by much of the market. Wells Fargo (and most of the big bank industry) has underperformed the overall market this year due to uncertainty around interest rates. However, as the Fed has already started raising rates (with more increases expected) business is looking up for Wells Fargo (i.e. higher rates improves Wells Fargo’s net interest margin and profitability).

Additionally, Wells Fargo has less exposure to “garbage assets” than many of its peers (e.g. Citigroup and Bank of America still have a lot of garbage assets on their balance sheets left over from the financial crisis). Plus, Wells Fargo has a significant portion of its revenues that are fee-based, which helps profitability regardless of interest rates. You can read our last full Wells Fargo report here…


Vanguard Total Stock Market ETF (Yield 1.9%)

In the spirit of the importance of diversification that we talked about in part one of this article, Vanguard offers an extremely low cost (0.05% management fee), well-diversified, ETF (the Vanguard Total Stock Market ETF, ticker VTI) that we believe could be an exceptional addition to most income-focused investment portfolios. Not only does this ETF offer a decent dividend, but it’s capital appreciation potential is relatively amazing compared to peers simply because the money investors save on fees will compound over time resulting in more assets available for investors to convert to income via capital gains harvesting.

Interesting to note, Warren Buffett essentially bequeathed this ETF to his heirs in one of his recent annual shareholder letters where he wrote

My advice to the trustee couldn't be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.

Buffett went on to say:

Both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions. The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit. So ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm.

In our view, this is a powerful message and important advice from the so called "Oracle of Omaha."


AmeriGas (Yield 8.2%)

AmeriGas (APU) is the largest propane distributor in the US (with about 15% retail market share), it’s organized as a master limited partnership (MLP), and it currently pays a big safe growing distribution yield of 8.2% (paid quarterly). Additionally, AmeriGas offers low volatility, a low beta, and an exceptionally attractive return on invested capital. Further, AmeriGas is uniquely positioned to successfully execute on its growth-through-acquisitions strategy, and fears of a declining propane market are largely overblown. And in addition to the recent 8% pullback in price over the last month (which makes for a more attractive entry point), the valuation was already very attractive for long-term investors.

Overall, we believe AmeriGas’ big distribution payments are very safe, and long-term investors may want to consider adding this MLP to their diversified income-focused portfolio. One word of caution, because AmeriGas is organized as an MLP, you may want to consult with your advisor before owning it in an IRA because it could trigger some unexpected tax consequences. You can read our full report on AmeriGas (from earlier this year) using the following link:



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