Morningstar Readers' Picks for Income

This past week was Income Investing Week on Morningstar.com. With that as a backdrop, we asked our readers to tell us a little bit about their favorite income investment.

Some readers said they liked dividend-paying stocks, particularly those with growing dividends that had the potential to exceed inflation. Others said they preferred bond funds for income, whether mutual funds, exchange-traded funds, or closed-end funds.

But many respondents said that a combination of income-producing asset classes--some dividend-paying stocks alongside fixed income, in just the right proportions--was the recipe for an optimal income-producing portfolio.

Reader kosnettj agrees with this approach: "That's exactly the right plan--some income from equity and some from debt--as you have seen, something is always working at any given time even though the attention seems to go onto that which is suffering (oil this year, emerging markets, whatever)."

Below we've included a summary of readers' responses. To read the whole thread and weigh in yourself, please click here.

Dividend-Paying Stocks Many readers, such as rforno, said they favor "high-quality dividend-paying (and in many cases, dividend-growing) stocks."

Rathgar also likes dividend-growers: "Dividend-growing stocks--if you buy an ETF, stock or fund the yield today may be only 2% but the future yield on your cost will exceed 4%. Growing dividends tend to come from very strong companies and these stocks hold up better in downturns. Ideal for retirees looking for inflation-adjusted income. And better than a below-1% CD with no growth."

"We try to stay diversified, and we hold bonds, cash, and CDs," said retiredgary. "However, our favorite income-producing investment is dividend-paying stocks because both the dividends and the value of the shares themselves increase over time, generally faster than the rate of price inflation."

"Basically, dividend-yielding stocks in taxable account, and REITs for retirement accounts," said

wendyd

, who likes

Several other readers, including Uysses and Acruisinglife, echoed wendyd's fondness for Altria. "I have too many favorties to list, but if I have to choose I'll say Altria. Since 2009 it has pretty much smoked most other equity investments on a combined total return/income basis," said Acruisinglife.

Statsguy

also likes dividend-paying stocks, but has a hard time picking a favorite. "How do you choose between steady-eddy income stocks like Realty Income,

Health1

likes "any dividend growth stock that I've held for a very long time" (such as

ShakAttack also likes Walgreens Boots Alliance. "Normally, I wouldn't be excited by a 1.5%-2% yielder, but my shares have been in the family for a couple generations. I'm not really sure what my basis is in the shares, but I think my yield on cost at this point is a couple thousand percent a year."

Some readers, such as BMWLover, said that they like preferred equities for their yields. "There are investment-grade companies, mostly they are financials, that have issued preferreds that pay in the 5.5%-6.5% range. While these preferreds may lose some value as interest rates rise, at the rate they are going it will be a long time before cash will beat them as an investment."

Acruisinglife mentioned preferred stock of Cenex Harvest States: CHSCP, CHSCO, CHSCL: "Low volatility, qualified divvies, not callable until 2024 and paying better than junk bonds," this reader said.

And though a handful of readers said they shied away from limited partnerships in favor of qualified dividend-payers owing to LPs' tax complexity, other respondents were attracted to the higher yields these equities pay out.

For example,

jkimel44

likes "master limited partnerships, and in particular the midstream energy companies such as Enterprise Products Partners LP EPD, Magellan Midstream Partners LP MMP, and

Finally,

smotals

mentioned high-yielders

smotals

.

Mutual Funds and ETFs

Skipperchg

said that investing in "plain vanilla" bond funds provides decent yield, high sector diversification, and low fees. Some of this reader's picks include

"PIMCO Income Instl PIMIX is the only fund I use for income harvesting right now," said dtconroe. "Each year, PIMIX has its income distribution amount set for a year, which allows a very consistent and predictable income stream at a very competitive level. It has been able to accomplish this without erosion of principal."

Retired at 48

likes

Yogiman is also a fan of Thornburg Investment Income Builder: "This is a world allocation fund paying 4.48%. I like it because it does not limit its search for income to just the United States."

Some Vanguard mutual funds also made readers' lists, including

Vanguardman

); Vanguard High-Yield Corporate (

bilperk

and

Brantley

); and

Chief K

).

"Vanguard Intermediate-Term Tax-Exempt and

JHAsheville

.

Some Vanguard ETFs were also mentioned by readers, including

Juris2

, who likes

Reti59,

who likes

Closed-End Funds Finally, some readers said they like closed-end funds for income, including NDinLA, who specifically mentioned "closed-end muni funds trading at a 10% discount."

retired at 48

, who likes this fund's "high yield (9%+), apparent excess of earned income over distributions (and expect another December bonus distribution)." This reader cautions that PDI is leveraged, however.

Richardsok and bubbygator are also fans of PDI. "[It] has +/- around 6% long-term volatility, with about 9% yield (depending on your entry point) ... paid monthly ... over-earning its payout ... typically with a nice year-end special (last year, 10 times the monthly distribution)," bubbygator said.