5 Things Every Income Investor Needs To Know Now

We're just past the edge. The "tipping point" is here.

Don't worry, it's not dangerous. In fact, if you're an income investor, then this might be the start of a very prosperous trend.

Between 2012 and 2030, every day roughly 10,000 Americans will turn 65. You might be among them. This marks a major shift that will play out for millions of people in the next years and decades. And I think that it could mean soaring popularity for income investing.

In fact, my colleague Amy Calistri outlined the case in a past article...

"Think about it. Some estimates have this group [baby boomers] controlling more than 80% of personal financial assets -- that's trillions of dollars. Much of that is tied up in housing and other non-liquid investments, but there are still loads of cash in traditional spots. According to the Investment Company Institute, there is $10.7 trillion in mutual funds alone.
 
As baby boomers wind down their working years, they're going to do what retirees before them have done -- shift from riskier stocks and commodities into more buttoned-down income investments. In fact, given the rocky market in the past decade and disappearing pensions, the shift could be larger than most people think."
 
This could lead to a golden age for income investing. But as attractive an opportunity this may be, there is no guarantee the graying of the baby boomers will simply lead to a massive bull market across all income securities. That's why it's still very important to select high-quality ideas. If you do this, then any broad bull market will simply be icing on the cake.

So to help you find the best high-yield plays -- and maximize your returns -- I've rounded up some of my favorite income investing tips. I use these tips personally to help guide my portfolio choices in High-Yield Investing, so no matter your experience level, they should give you an edge in finding the best income investments on the market. And if we see the big shift into income securities in the years and decades ahead, then all the better.
 
Tip No. 1 - Look off the beaten path: Always remember that yield is a combination of dividends paid and share price. If prices rise, the yield on a security falls, all else being equal.
 
So what will happen to many popular high-yield securities if millions start buying them in search of solid income? Their prices would likely rise, pushing yields down.
 
That's why it's valuable to look off the beaten path for higher yields. You have to look into the special classes of securities built for income investors. My years of researching the income field have uncovered even the rarest of these assets, including securities such as business development companies, stapled products, master limited partnerships and even exchange-traded bonds. This is where you'll uncover truly mouth-watering yields the majority of investors who are focused on common stocks tend to overlook.
 
Tip No. 2 - Dividend safety is key: For us income investors, nothing should be held in higher esteem than the safety of our dividends. After all, what's the use of a high dividend if it's only going to be cut a few weeks later?
 
But an amazing thing happens when you follow my first tip and look off the beaten path for income investments.
 
Common stocks are under no obligation to pay a dividend; they can cut their payments at any time if they please. But I've found a few securities -- such as preferred stocks -- that can't change or reduce their payments. A number of other little-known securities have the same restrictions, all but guaranteeing you'll be paid a stream of income you can count on.
 
Tip No. 3 - Use market downturns to find higher yields: Most investors look at a market downturn as a bad thing, and in fact, I would rather the market rise than fall. But I also appreciate the opportunities that appear in a downturn.
 
As I said, a stock's yield is a function of its price. If a stock pays $1 per share and trades at $20, its yield is 5%. If the same stock dips to $10 per share, the yield has risen to 10%.
 
That's one reason why I buy heavily during market downturns -- the yields become too high to ignore! If you can stomach volatility during a bear market, then you'll likely have a chance to lock in unnaturally high yields.
 
Tip No. 4 - Don't be afraid to take a loss: High-Yield Investing subscribers always ask me when to sell their holdings. And for good reason -- when you sell is just as important as when you buy.
 
I'm personally never afraid to take a loss. Many investors continue holding losing stocks and hope for a rebound, only to watch them sink further. I've seen this countless times, so I'm always sure to look at the reasons a holding is falling and if I should sell.
 
If the stock in general is falling with the market, then I may not be worried. However, if changes in the company's operations mean it could see rocky times ahead, then I don't want a part of it.
 
Tip No. 5 - Taxes matter: When is a lower yield more attractive than a higher yield that's just as safe? When the lower yield is taxed at a lower rate.
 
Consider this: An investor in the top federal tax bracket is invested in a municipal bond that pays 6%. Because the income from this bond is tax-free, the taxable-equivalent yield is actually 9.2%! In other words, if the same investment were in a fully taxable security, then our investor would have to earn 9.2% to have the same income after taxes.
 
by Carla Pasternak