Building an Income Portfolio

How can you generate sufficient income to match my income needs and risk tolerance?

This question was asked by Bob from Nanoose Bay last week. His situation is similar to many retirees faced with income needs at a time when stock markets remain uncertain and interest rates are low.

Bob needed about $550 per month or 6.6% to supplement his income. He has $100,000 to invest. Unfortunately, we cant get him 6.6% in a term deposit. So we discussed that we can look for the highest yielding term deposits, which were around 4.70% well short of his required 6.6%.

Then we discussed other options such as corporate bonds, government bonds, income trusts, dividend funds and balanced funds. While he wanted the income, Bob really wanted an income portfolio. Based on his conservative risk tolerance he doesnt mind taking some risk.

We then looked at some model income portfolios and their risks and came up with some possible portfolio options. Each portfolio is structured differently in the amount of tax he will pay (interest, dividend income or capital gains income) as well as the amount of risk. Through a simple mutual fund structure here is an example of the income portfolios he can develop:

  • 50% federal and provincial bond and 50% corporate bonds.
  • 50% term deposits and 50% corporate bonds.
  • 33% preferred equities, 33% income trusts, 33% dividend paying common equities.
  • 25% corporate bonds, 25% preferred equities, 25% income trusts, 25% dividend paying common equities.

The income trusts used in this example consisted of a fund that invests in 25% business trusts, 25% real estate investment trusts, 25% resource trusts, 25% utility trusts.

Now Bob has an understanding that by combining lower risk income options with potentially higher return income options he can generate income for his retirement that can match his risk tolerance and monthly cash flow.

He can also look at existing portfolios that are designed to generate income and preserve capital for investors and see that over his time horizon, he can achieve his financial goals.

Written by Grant Hicks

Grant Hicks, C.I.M., FCSI is a professional speaker, co-author and a Retirement Planning Specialist with Manulife Securities and Hicks Financial. A leader in the financial industry, Grant has been helping Vancouver Island residents plan and create their retirement lifestyles since 1989.

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