The Evergreen Portfolio: Timeless Strategies to Survive and Prosper from Investing Pros

Chapter 10. High-Yield Investing in the Shadow of the Big W

Roger S. Conrad

Inflation and credit concerns: These are the two basic risks of income investing.

If you want to live off portfolio income, you've got to stick around long enough to capture the dividends and interest. That leaves no alternative but to successfully deal with both threats.

For the better part of two years, credit risk has been the primary danger. Wall Street always produces for investor demand. And before the 2008 market crash, that craving was for high yields. The Street launched a plethora of new securities to capture it, ranging from the more traditional, such as master limited partnerships and real estate investment trusts, to entirely new derivatives like income deposit securities, which combined equity with debt into a single security.

Unfortunately, when the credit crunch hit, many of the new issues weren't up to the challenge. Yields that tempted many vanished overnight amid an avalanche of dividend cuts and even bankruptcies. For many of the failures, the key was that the underlying businesses were ill-suited for any structure paying out big dividends. For others, the blame lay with piling on too much debt to fund growth. But whatever the cause, the results have been the same: cratered share prices and a loss of income that will never be recovered.

Not even the strongest companies' stocks, bonds, and preferred stocks have wholly avoided the extreme volatility and risk that's prevailed since mid-2007. ...