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  Realty Income Corp (O) and  Altria Group (MO).

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,  Suburban Propane Partners LP (SPH),  General Mills (GIS),  Coca-Cola (KO),  Sysco Corp (SYY) ... I just have to stop listing them since I like them all, though I like each for a different reason." 

Health1 likes "any dividend growth stock that I've held for a very long time" (such as  Walgreens Boots Alliance (WBA) and  Cisco Systems (CSCO)). "Each are kicking off tons of dollars due to holdings. I'm hoping that  Gilead Sciences (GILD), while a small dividend now, becomes another soon! Ditto for  Under Armour (UA) 10 years from now," said this reader. 

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  Energy Transfer Partners LP ,” this reader said. "To refine it further, my top picks now would be those MLPs which focus on natural gas and which have fee-based contracts."

Finally, smotals mentioned high-yielders  Cedar Fair LP (FUN) (which is structured as a limited partnership) and  Nordic American Tankers Ltd (NAT) (which is not). "If they drop on volume, I'll take my profit, but I’m gonna stick around for some dividends. NAT is in ship financing and the group got hot so I'll watch it more closely. FUN runs big amusement parks, they're local, reasonably priced with virtually recession-proof demand. I'll take the yield while I wait for growth," said 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  Vanguard Total Bond Market Index I (VBTIX);  Vanguard Interm-Term Investment-Grde Adm (VFIDX);  Vanguard High-Yield Corporate (VWEHX); and  Fidelity Strategic Income .

"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  Thornburg Investment Income Builder I (TIBIX). "I used this fund as a partial replacement for the bond funds in the fixed-income side of my allocation, when yields went very low in 2009. TIBIX’s yield was above 6%, now in 4.5% range. Very pleased with total return last five years."

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  Vanguard Wellesley Income (VWIAX) (Vanguardman); Vanguard High-Yield Corporate (bilperk and Brantley); and  Vanguard Interm-Term Tx-Ex Inv (VWITX) and  Vanguard GNMA (VFIIX) (Chief K). 

"Vanguard Intermediate-Term Tax-Exempt and  Vanguard High-Yield Tax-Exempt (VWAHX) along with a healthy dose of   Vanguard Dividend Growth Inv (VDIGX) take care of the basic income-producing needs,” said JHAsheville. 

Some Vanguard ETFs were also mentioned by readers, including Juris2, who likes  Vanguard Dividend Appreciation ETF (VIG) and  Vanguard High Dividend Yield ETF (VYM), and Reti59, who likes  Vanguard Tax-Exempt Bond ETF (VTEB).

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." 

 PIMCO Dynamic Income (PDI) was mentioned by a several readers, including 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.