Thoughts on Investing for Income

The last few years have been difficult for the income investor. Prudence meant investing in short and intermediate bonds as the Federal Reserved raised rates. It was assumed that investments in longer maturities, including preferred stocks, held more than normal risk, thus resulting in potential reduction of principal and ultimately, income for many investors. The flat yield curve has to some extent allowed for increased income for investors focusing on very short term securities such as US T-bills and CD's. We are now seeing forecasts that suggest that shorter-term rates may well be either stabilizing or perhaps heading down. In a recent report UBS indicated their belief that the US economy will experience a "growth deceleration.....and a rate cut [by] December 2006." Bank of America's website forecasts a rise in the "Fed Fund rate to 5% and remain there for the balance of the year." These represent just a few of the examples reflecting a potential decline or flattening in interest rates.

With that in mind we believe portfolios should have a widely diversified bond/income component. In addition to the typical investments, we are structuring portfolios using Exchange Trade Funds, discounted closed-end fixed-income funds (corporate, preferred, senior bank debt, foreign and municipal) and REIT's. These investments are currently yielding between 6.5% and 9.0% for taxable debt and 5.5% to 6.0% for municipal fixed income. We believe such an approach will result in solid returns in this flat yield curve environment and higher returns in an environment of declining interest rates. It will also improve income stability going forward.

Strategy Update: We recently reduced again our exposure to commodities in the Dynamic Commodity Strategy. Reason? Too much frenzy there for our liking - a time to lean into the wind.