The Layaway Plan
Fortune (08/14/00) Vol. 142, No. 4 p.125; Diba, Ahmad

To avoid some of the risk inherent in a stock portfolio, an investor should consider income-producing stocks. Such stocks collect a steady stream of income in the form of dividends from high-yielding stocks or interest from convertible bonds. These stocks are often in mature industries like real estate, energy, and utilities that often act in opposition to growth stocks, adding security to a portfolio through diversification. For example, when the Nasdaq lost 7 percent from April 1 to mid-July, utilities were up 11.6 percent and real estate investment trusts climbed 15.3 percent. There are a few securities that produce a reliable stream of income and are backed by the potential for moderate capital growth. Some are businesses with alternative legal structures, like real estate investment trusts or master limited partnerships. Also, convertible bonds, which have combinations of the features of stocks and bonds, offer reliable income. One such stock is Southern Co., which is expected to sell off 20 percent of its independent power subsidiary in an IPO. The new company, Southern Energy, is expected to grow at an annual rate of 30 percent, while the parent offers a 5.5 percent yield and profit growth of up to 8 percent. Another option is real estate investment trusts, which are basically mutual funds for real estate that trade on exchanges like stocks. They have consistently offered some of the highest yields in the equity market, from 5 percent to 10 percent.

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