Steady Income from Volatile Sources

Sudden sell-offs can be scary, but the income side of income investing delivers reliably.

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Even investors who emphasize a flow of spendable cash and don't trade much tell me they hate volatile prices for their income-oriented securities. I'm with you, because I also dislike seeing sudden and scary sell-offs in yield-centric portfolio staples such as real estate investment trusts, oil-and-gas partnerships and dividend stocks. But the top priority for income seekers should be maximum assurance that interest and dividends will arrive in full and on time. And fortunately, despite the volatile market action of late, the income side of income investing (stock dividends and bond interest payments) remains reliable.

Dividend cuts and debt defaults are largely limited to cases of fraud or mismanagement. Bonds have regained some of the value they lost earlier in the year as medium- and long-term interest rates–notably the yield on 10-year Treasuries–have retreated amid renewed heavy demand, including by individuals pouring money into fixed-income mutual funds and exchange-traded funds. (Prices and yields move in opposite directions.) It's true that certain income investments look crazy expensive. Boeing (symbol BA, $339, yield 2%) has raised dividends 88% since 2015 to become as much a primo cash cow as a (now) high-flying industrial stock. That's helped double the price of the shares since then and sent the price-earnings ratio to nearly 25 times estimated earnings for the next 12 months. (Prices, yields and other data in this column are through April 20.)

Look beyond price. However, the price of the stock isn't always as important as the timely payment of interest and dividends. And that service is not suffering at all from the wild and woolly behavior of share prices.

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Here's an analogy: When a Boeing 767 takes off from New York City for San Francisco, the travelers might have paid anywhere from roughly $120 to $1,200 for their tickets. Yet all expect to arrive safely and at the same time (whether on schedule or late). Similarly, when Boeing pays close to $1 billion to its stockholders in March, June, September and December, some payees will have an average cost of $75 a share, for others it will be $175, and for a handful it will be more than the current share price. But everyone will get the same $1.71-per-share dividend.

Although Boeing might not always be able to raise dividends by leaps and bounds–and its price is at risk on any given day due to fears of escalating trade tensions–I urge you to stay aboard for the high and safe income. Among other virtues, Boeing generates $11.7 billion of free cash flow annually–enough to cover its $3.4 billion dividend tab several times over.

Boeing is but one example among many. The same rationale applies to AT&T (T, $35, 5.8%) and Verizon (VZ, $48, 4.9%), which pay out a combined $21 billion a year. Both companies can easily afford it, and the stocks are obvious keepers. Their shares have been up and down (mostly down of late), but that has no effect on the safety and constancy of the dividend payments. (For more income investing ideas, see Earn Up to 11%.)

All told, in a messy first quarter, 948 U.S. companies raised dividends, with an average hike of 7.6% from the first quarter of 2017. There were just 167 cuts or suspensions.

Most bond strategists I talk to don't believe that wild trading imperils your coupon payments, either. Robert Tipp, of the Prudential Insurance Company's massive bond-investment arm, is advising clients to stay the course as "a lot of this noise blows over." If you study the charts and the indexes, stock and bond prices are largely where they began this year, despite the occasional huge drops in the Dow Jones industrial average. Buying on the dips still makes sense. In March, REITs and utilities recovered much of what they lost in January and February. So for now, continue cashing your checks, hold on to what pays on schedule, and enjoy your summer.

Jeffrey R. Kosnett
Senior Editor, Kiplinger's Personal Finance
Kosnett is the editor of Kiplinger's Investing for Income and writes the "Cash in Hand" column for Kiplinger's Personal Finance. He is an income-investing expert who covers bonds, real estate investment trusts, oil and gas income deals, dividend stocks and anything else that pays interest and dividends. He joined Kiplinger in 1981 after six years in newspapers, including the Baltimore Sun. He is a 1976 journalism graduate from the Medill School at Northwestern University and completed an executive program at the Carnegie-Mellon University business school in 1978.