Savvy Asset Allocation For The Income Investor

inflationLawrence Meyers:  When you are designing a long-term portfolio, one of the trickiest elements is properly allocating your chosen asset classes. This is particularly challenging if your long-term portfolio is geared more towards what an income investor desires, as opposed to someone who wants a completely diversified portfolio.


There is no one “right” allocation. The first step in asset allocation is deciding on your risk tolerance. If you are extremely low-risk, then that portfolio is going to be very different even from the average investor.

What I’m providing here is a suggested asset allocation for those who are geared more toward income and average risk. Those with higher risk tolerance can obviously increase the weighting of pure equities while those of lower risk tolerance can decrease it.

Start With Stocks

The first place to start is with equities. Even if you are an income investor, you have to have stocks, because they are going to provide you with some capital gains over time, as the stock market has a long-term upward bias.

I would start with a 15% weighting in large-cap dividend stocks. This would include either an ETF like Vanguard High Dividend Yield ETF (NYSEArca: VYM) or some of the stocks that the fund holds. This gives you exposure to solid brand-name companies with dividends generally paying 3% or more.

Some conservative investors think international stocks should be avoided, but I totally disagree. International stocks are undervalued compared to domestic stocks right now, and there are numerous outstanding international companies that pay very generous dividends. The iShares International Select Dividend (NYSEArca: IDV) yields 4.5%, and contains several big and familiar names in energy, financial services and pharmaceuticals. I would put 15% in here.

Because of the risk associated with mid-cap and small-cap stocks, I would advise the income investor to only go with companies that they are specifically familiar with. Stocks in these asset classes don’t pay dividends quite as much.

Real Estate Always Comes Back

Next, I would allocate 15% into REITs. The great thing about real estate is that, even if times get really hard such as they did in the financial crisis, real estate will always come back over time.

REITs are required to pay 90% of net income as dividends. Personally, I would diversify across many different kinds of REITs, which you can do using iShares Cohen & Steers REIT ETF (NYSEArca: ICF).

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