How to Create a Perpetual Income Machine

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Arthur Edwards
5 years ago
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1 How to Create a Perpetual Income Machine Perfect Pie Portfolio Real Estate Fixed Income Equities

2 How to Create a Perpetual Income Machine: Build Wealth on Just $100 a Month with Fixed Income Investments PERPETUAL income sounds mythical something that can t really exist, like unicorns or alchemy. But it s not. It is very real and entirely possible, and with this report, I m going to show you how to create a practical and profitable Perpetual Income Machine that can drive your retirement assets and your portfolio. It s all part of the Perfect Pie Approach. Back when I first introduced this idea, the world was a bit simpler The economy was booming, the Federal Reserve hadn t yet embarked on its easy-money policies and my goal was to create a set it and forget it portfolio that could last long after my book was published. But that s not the case anymore. With historically low interest rates killing savings accounts, investors have gotten frustrated and are reaching for risky high yields. But here s the thing you don t need to invest in risky assets to build incredible wealth and become financially secure for life. All you need to become an Automatic Millionaire is an average gain of 10% per year. Think I m crazy? Take a look at this table. It shows you how long it will take to amass $1 million on as little as $25 a week, with our goal of 10% average annual gains. This table simply proves that ANYONE can become a millionaire if they choose to even on as little as $25 a week. Savings Growth at Different Weekly Savings Rates Weekly investments with 10% annual return compounded annually Years Weekly to $1M Investment Years Years Years Years Years Years Years Years Years Years 46 $25 $8,335 $21,758 $43,376 $78,193 $134,265 $224,570 $370,006 $604,234 $981,459 $1,588, $40 $13,336 $34,813 $69,402 $125,109 $214,825 $359,313 $592,013 $966,778 $1,570,342 $2,542, $65 $21,671 $56,571 $112,779 $203,302 $349,090 $583,883 $962,019 $1,571,012 $2,551,801 $4,131, $110 $36,673 $95,735 $190,856 $344,048 $590,767 $988,109 $1,628,032 $2,658,635 $4,318,431 $6,991, $180 $60,010 $156,658 $312,310 $562,988 $966,706 $1,616,905 $2,664,051 $4,350,492 $7,066,521 $11,440,714 1

3 But if you ve already got a sizeable nest egg, then 10% a year can either grow it much faster or deliver a safe, steady income check for years to come. So how will we create a safe, robust portfolio that aims for 10% gains per year, even in today s markets? The first 1/3rd of your Perfect Pie: Fixed Income Investments The fixed income portion of your Perfect Pie Portfolio is for anything that isn t a typical stock investment and that focuses on producing consistent income payments, including: U. S. Treasurys (Treasury Bills, Treasury Notes and Treasury Bonds); Corporate bonds from the strongest, safest companies in the world; Municipal bonds from financially sound state and local governments; and Mutual funds and Exchange Traded Funds that bundle various securities like equities and bonds even currencies and commodities. All of these fixed-income investments focus on two primary goals... the safe return of your original investment and interest rates that beat inflation. But with many of the traditional income investments yielding close to nothing these days, investors are making some critical mistakes and chasing risky, high-yield returns without checking the quality, stability and reliability of those investments. This part of your portfolio is designed to provide stability in both up and down markets without significantly increasing risk. In this report I ll reveal my favorite Fixed Income plays right now. Before I give you the details, I must explain something. Perhaps one of the greatest features of the fixed-income investing is that it can grow indefinitely, all thanks to the power of compounding. Take a look at the example below: Total Income Drives Bond Fund Returns Over Time 2000% Cumlative Total Return Cumlative Price Return Rising Rate Period 2/1994 to 6/1999 to 6/2004 to 2/1995 5/2000 6/ % Cumlative Total Return (%) 1500% 1000% 500% 0% 75% 50% 25% 0% Cumlative Price Return (%) -500% -25% SOURCE: Barclays. Returns shown are from monthly Barclays U.S. Aggregate Bond Index returns from January 1976 to May Total return equals income plus change in price with a reinvestment of interest payments. Past performance does not guarantee future results. 2

4 Simple cumulative price return is well under 15%. But reinvest those income payments, and with those reinvestments our total return explodes to almost 2000%. For comparison, over the past 10 years the average S&P 500 dividend yield clocks in at 2.1%, and during that same period the U.S. Aggregate Bond Index has averaged returns of 4.6%. The performance numbers in the chart above might actually be a little on the conservative side, as one of the funds I m about to share with you is paying out a whopping 8.5% right now. So let s roll up our sleeves and get started My Top High-Yield Investment The first component of your fixed-income slice of the pie is a closed-end fund that bundles some of corporate America s largest and strongest companies bonds. It s worth mentioning that two of our three fund solutions for delivering perpetual income come from BlackRock. The company holds roughly $4.5 trillion in assets under management. BlackRock is one of America s strongest investment companies, and the world s largest investment manager. During the 2008 financial meltdown, BlackRock was selected by the U.S. government as one of the best firms to help clean up the mess. They helped the Treasury Department analyze and unwind the toxic mortgage assets that brought the system to its knees. BlackRock is one of the largest money managers in the world and arguably the most powerful. When we invest we want to put our money with trusted leaders and leadership. This fund manager has both. Action to take: Buy BlackRock Corporate High Yield Fund Inc. (NYSE: HYT). BlackRock Corporate High Yield Fund, Inc. (HTY) Share Price Adjusted for Dividends SOURCE: Yahoo! Finance 3

5 HYT invests in domestic and foreign high-yield securities, including high-yield bonds (commonly called junk bonds), corporate loans, convertible debt securities and preferred securities that are below investmentgrade quality. They fund an effective duration of about five years. (The longer a fund s effective duration, the more sensitive it is to shifts in interest rates. A fund with duration of 10 years is expected to be about twice as volatile as a fund with a five-year duration.) While it does have some exposure to international bonds, the vast majority of its holdings over 81% are here in the United States. That s good if you believe the dollar will remain strong, as I do. And if the dollar does weaken against international currencies, the global exposure will help buoy returns. It currently yields 8.4%. That s just under the fund s 8.6% return since inception, but over the 7.9% average annual return over the past 10 years. As I explained in your #1 Investment for 2016 report, besides dividend yields, closed-end funds have two important prices you need to be aware of: 1. The price you pay when you buy it (the market price); and 2. The Net Asset Value (NAV). That is, the value per share of the underlying assets in the fund. The price of a fund can go up and down in value independently of the value of its portfolio. This is important to know because it means that we can invest in out-of-favor funds that are trading at a discount to their NAV. Basically, we can grab the funds for cents on the dollar. The Blackrock Corporate High Yield Fund Inc. is currently trading at a sizable 8.95% discount to its NAV of $ Combining the discount with the current yield, you could be looking at an effective 17.3% return in just one year if the share price trades back in line with its NAV. That s a great start for your perpetual income engine and a great piece to your pie! My Top Preferred Stock Investment My #1 preferred stock investment currently yields an amazing 5.89%. This is one of the best ways to get started with preferred stocks of America s best companies. Some of the top holdings this fund has here in the U.S. are made up from Wells Fargo & Co., Morgan Stanley, Citigroup, BB&T and Bank of America. I m a big fan of preferred stocks and have been investing in them for myself and my clients since the beginning of my career. I personally have over $500,000 right now in this fixed income asset class for my family. Preferred stock can be thought of as a cross between a stock and a bond. When companies issue preferred stock, they set a dividend payout rate that gets paid every year. If they miss a payment, then they generally can t pay dividends to regular common shareholders before they ve made up the payments in arrears. This income stream is just part of the reason why they call it preferred stock. By investing in preferred stock funds we protect ourselves from over-owning a single stock or two through diversification. Even if something does happen to one of America s strongest companies, the impact will barely be felt by our portfolio. Action to take: Buy PowerShares Preferred Portfolio ETF (NYSEArca: PGX). 4

6 PowerShares Preferred ETF (PGX) Share Price Adjusted for Dividends SOURCE: Yahoo! Finance PGX invests in fixed-rate, U.S. dollar-denominated preferred securities issued in the U.S. domestic market. Securities must be rated at least B3, based on an average of the three leading ratings agencies: Moody s, S&P and Fitch. More than 85% of PGX s holdings comes from the financial sector. Utilities, telecommunications, and the industrials sectors add another 13% of the fund s holdings. It has an effective duration of 4.8 years and a weighted average coupon (industry speak for interest rate) of 6.5%. It currently yields 5.89%. Over the past five years, PGX has returned 7.3%. PGX was opened in the unfortunate window of February 2008 and after a tough few years has leveled out to provide the kind of stable performance and steady dividend payouts I love. It s important to know that preferred stock trades like fixed income and can become volatile when rates rise. Still I believe these funds will provide a nice cushion of dividends when the markets get volatile. My Top Bond Fund Lastly, my #1 bond fund is invested in a wide range of government and corporate bonds. With at least 75% of the portfolio listed as investment grade, this fund adds stability and long-term strength to your assets. Action to take: Buy BlackRock Core Bond Trust (NYSE: BHK). The 866 holdings in BHK are fairly diversified across sectors. A total of 33.8% of the fund holds investment grade credit. Securitized products make up 22%, high-yield bonds represent 15.1% and U.S. governmentrelated investments add another 11.5% to the fund. These investments are primarily spread over banking, communications, U.S. Treasury, and U.S. government agencies. 5

7 BlackRock Core Bond Trust (BHK) Share Price Adjusted for Dividends SOURCE: Yahoo! Finance It has a yield-to-maturity on its holdings of 6.4%, with effective duration of about 9.4 years. Like the BlackRock High Yield Fund (NYSE: HYT), it holds a portion of its exposures internationally. With a larger domestic portfolio, the vast majority of its holdings over 87% are based right here in the United States. The fund is currently yielding 7.1%. BHK currently trades at a 6.28% discount to its NAV of $ Combining the discount value with the current yield, you re looking at an effective potential 13.4% return in just one year if BHK s price rises to match the value of its own portfolio. There you have it: three solid, fixed-income investments for your fixed income slice of the Perfect Pie Approach with an average yield of 7%! Combined these investments will create the engine to power a perpetual machine of wealth that can help you become an Automatic Millionaire. How and Where to Invest Buying these investments couldn t be easier. They trade like stocks, so you simply contact your brokerage firm and enter an order for the number of shares you want to own. Of course, you need a brokerage account to get started. You probably already have one, but just in case you don t, here is a list of well-known brokers to help you get started: TD Ameritrade Interactive Brokers Charles Schwab

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9 Publisher...Shannon Sands Founding Editor...David Bach Managing Editor...Teresa van den Barselaar Bach Investment Research 55 NE 5th Ave., Suite 200 Delray Beach, FL USA USA Toll Free Tel.: (866) Contact: Website: Legal Notice: This work is based on what we ve learned as financial journalists. It may contain errors and you should not base investment decisions solely on what you read here. It s your money and your responsibility. Nothing herein should be considered personalized investment advice. Although our employees may answer general customer service questions, they are not licensed to address your particular investment situation. Our track record is based on hypothetical results and may not reflect the same results as actual trades. Likewise, past performance is no guarantee of future returns. Certain investments such as futures, options, and currency trading carry large potential rewards but also large potential risk. Don t trade in these markets with money you can t afford to lose. Delray Publishing expressly forbids its writers from having a financial interest in their own securities or commodities recommendations to readers. Such recommendations may be traded, however, by other editors, Delray Publishing, its affiliated entities, employees, and agents, but only after waiting 24 hours after an internet broadcast or 72 hours after a publication only circulated through the mail. Also, please note that due to our commercial relationship with EverBank, we may receive compensation if you choose to invest in any of their offerings. (c) 2016 Delray Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. This Newsletter may only be used pursuant to the subscription agreement. Any reproduction, copying, or redistribution, (electronic or otherwise) in whole or in part, is strictly prohibited without the express written permission of Delray Publishing. 55 NE 5th Avenue, Suite 200, Delray Beach, FL

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