Stop Letting Your Cash Sleep -- Discover Predictable Income Strategies for HNW Investors

You got money sitting at the bank, or if you need income that you can count on, this is your wake-up call. The right income investments can work for you quietly, consistently, and predictably. And here's the thing: this is not about chasing the latest hot stock or swinging for the fences. This is about creating a dependable cash flow that gives you more control over your financial life. By the end of our time today, you're going to have a much better understanding of why income income securities might be the missing piece of your portfolio strategy. Welcome to Fundamentals of Investing. I'm Brian Dress, Director of Research here at Left Brain and also an investment advisor, joined as always by our CEO and Chief Investment Officer, Nolan Langford. Nolan, welcome to the program.

Hey, Brian. Glad to be here talking about this important topic, income security. And it's always a good time to talk income, my friend. Looking forward to it.

Never a bad time to talk about income, for sure. We're talking about income securities, if you hadn't gathered by now. But this is something that's important and that we put— that we put a lot of time in for our clients and it's certainly a cornerstone investment for a lot of our clients. Income security is a little bit of an amorphous term, Nolan. So let's start out with an easy one. Can you just give us a brief description of what we mean when we say income securities?

Yeah, I guess that's a good way to start. I guess it's kind of a novel term, income securities. So when we think about investing, typically we're buying something at some price, $10, and we want it to go up 15, 20, 25, 30.

I like it when it goes to 100.

But eventually, you know, we need to turn whatever growth that is into cash because we can't necessarily spend growth. And when we talk income securities, we're talking about fulfilling a need. And just about everybody we come across has a need for income, either now or later. And when we talk income securities, instead of being securities that you can buy at 10 and hope that they go to 100, these are securities that pay out instead of putting their money, reinvesting it into the entity for further growth. Generally, they're paying out a good chunk of their current income to shareholders in the form of dividends or a stream of income. That's the difference. One of them is investing for growth later. The other one is I will pay you today.

Okay, got it. So just to give you everyone a roadmap of where we're headed here, we're going to talk through 5 points. The first is we're going to talk about our approach to income securities. In Section 2, we're going to talk about who needs income securities. In Section 3, we'll talk about the types of income securities that we look at here at Left Brain. In Section 4, we'll talk about what types of income securities work best in different interest rate environments. So we'll talk a little bit about how interest rates fold into this topic as we go through. And then the 5th section, we're going to talk about how, how should you proceed if you don't have these income securities in place. So Pretty simple. We'll walk our way through. I know we'll probably take some time to get through these things, but it takes— it's worth plenty of time to discuss income security. So, Nolan, before we jump into our approach to income securities, do you have a few words that you want to open up the kind of the discussion with?

Sure. So income securities by the term may not seem sexy. You know, it's not buying Bitcoin. It's a little bit different than buying an AI chip stock or something and watch it go up every day. Income securities we buy for steadiness, for predictability. And because I have a need, I need income and I need something that can pay me that income to generate what I need to pay my obligations. And so it certainly may not be sexy, but it really is important.

Okay, so let's jump right into section 1, and that's our approach to income securities here at Left Brain. So Nolan, before we talk about specific types of securities that we consider for clients, we want to talk a little bit about how do we evaluate these options for clients? Because there are many more income securities than there are stocks. It's a much bigger market out there. And so we want to talk a little bit about how do we evaluate the opportunities that come across our desk, which are many. So Nolan, let's start with a quick question, which is, how can you, can you describe for us what Left Brain looks for in an income security on a general, generally speaking?

Well, generally speaking, because income securities you're not seeing a lot of growth. Again, like we mentioned in the example, we're not buying something at 10, we hope it goes to 100. And so because of that, we really want to make sure whatever income that we're getting, that's going to be the source of our return. So we want to be really confident that whatever stream of income we have going in, we want to be comfortable that we're going to receive that income for a long period of time. And hopefully that income can grow for us over time. So it's a little bit different way of looking at it. Instead of looking at my upside, I'm kind of looking at my downside. Okay.

And then you did bring up the word confidence. So we want to feel confident in any investment that we purchase for ourselves or for clients, but specifically in income, because we want to be confident that those income streams are going to keep coming because a lot of our clients rely on this income in order to pay their bills. So how do you evaluate the level of confidence that you have in an underlying company that they can continue to pay the income to the investor?

You know what? I think that question that you just teed up is really important. It's something that we didn't talk about earlier because we're talking about the different types of securities, but the securities themselves are only a derivative based off of the underlying business or enterprise itself. So if the enterprise itself is not doing well, it's very likely no matter what security they've issued also is not performing very well. And conversely, the exact same thing. So the first thing that we want to do when we're evaluating income securities is we want to make sure that we have a healthy enterprise, that whatever enterprise or business or corporation or entity is issuing this security, same thing. We want to make sure that the operations are healthy, that the management team is good, that they are prosperous entity. Hopefully the entity is growing and thriving. And so that part of it's not that much different from us looking at any other security. We want to make sure the security, the entity itself is a healthy institution that is going to be around to honor its obligations.

Yeah, we're participating in businesses here, really, at the, at the end of the day. I know sometimes investments get separated from the business in some people's minds because you think about I'm owning a piece of paper in a stock or in a bond, right? But that piece of paper is— I guess that's an old term, piece of paper. It's not really paper anymore, but that security is connected to a business. And so we have to know that that business is strong enough to continue and continue paying you the money that they're, that they're paying you out of their profits, right? And so let's talk a little bit about numbers. So again, this is nothing that we're promising. We're not promising any particular rate of return, but when you're evaluating a security in the income world, what type of return are you looking for in that security?

And just to level set so all the listeners know, we're doing this taping here at the very end of the summer of 2025. And at the current time, you know, we're looking at interest rates. You know, the 10-year Treasury right now has been bouncing between 4% and 4.5%. Yeah, maybe it's a little bit lower right now because we think interest rates are going lower. And then on the short end, it's not that much different in rates. You know, we've been bumping between that 3% and 4%. Range on the short-term end. So those rates, you know, over time is what you look at. And we want to look at if those are what safe securities are paying on the short end, a little bit less between 3 and 4, you know, on the other end closer to 4. Well, those are government rates that we know that there's not a lot of risk. Right. So anything else that I'm doing that may be a little bit riskier than just having the government guarantee my payment, I'm going to demand a higher return because there's a little bit more risk. And so the first security that we think about is just a corporate bond. It's a very vanilla obligation, not that much different than a CD. It's just a promise to pay. I'm going to buy this obligation from this corporation. They have promised to give me an interest rate and then pay me back the principal at the end of it. And those are typical bond obligations today in a 4% government world. Those government, those corporate bonds are about 6%. So from a range of what we can expect, if I, you know, if we want at least 5 years or go longer on our maturity, we can expect in today's world about 6% from corporate bonds. So that's probably the first security that we want to discuss. Okay.

And we'll get into the types of bonds here in Section 3. How do we— so I guess one question I have is obviously when we put together a portfolio of bonds or income securities, we're not buying one or two. Because that wouldn't be prudent for ourselves or for clients. So how do you think about bulletproofing income portfolios against a company-specific event? You know, say you own a particular bond and that, that company goes bankrupt. That's obviously going to create a loss for, for, for a client or an investor. How do you think about bulletproofing an income portfolio against that potential event?

You're right. Building these things you know, it's not just the evaluation of the security, but it's also how do you build a portfolio with these? There's a lot of things to think about. Obviously, business risk is one of them. Generally, when you're building a portfolio, we're looking at income securities. We want to be diversified. Now, I would say, you know, ideally you'd like 25 to 30 of them. I know we produce a model income portfolio right now. And as of the last update in July, we had 35 names on there. So you definitely want to be diversified. If something happens with one of the names and you have an offset with the other 34, and it's not just if something goes wrong. I generally want to be diversified for a few reasons. One of them is a lot of the holdings that are in this, in the basket will respond to different economic environments. So we're going to talk about interest rates and what that does. You also have the economic cycle, you have geopolitical events. There's a lot of things that can move these prices. So the more diversified I am, the less shocks that are really going to throw me off balance. The other thing is income, you know, income securities, they don't all pay the same rate, nor do they pay at the same time. So by me being diversified, you know, I can really smooth out my income stream not only by types but also by timing. And so all of those things are really important when you're looking at building an income portfolio and bulletproofing it, as you mentioned.

Right. So what you're saying is that certainly in retirement or at any time, people have bills that come on a steady basis. And, you know, certain bonds pay on certain dates, certain bonds mature on certain dates. And so we have to find a way to match people's liabilities or bills with the money that's coming in or the income from these income securities. So Definitely a good way of looking at that, Nolan. Let's jump to section 2. We want to talk about who needs income security. So there are a lot of different applications for income securities and a lot of different reasons why people might own these. So there are 3 main types of people who have a need for income security. So the first one is Nolan, and this is— we encounter this probably as much as we do anything else. Idle cash at the bank. People have a lot of money that just builds up at the bank for whatever reason at the bank. And when you have money at the bank, the average checking account according to FDIC in today's world right now, July 2025, is paying 0.07%. That's not 7%. That's not 0.7%. That's 0.07%. And the average savings account is paying 0.38%. So pretty horrible considering that inflation's running somewhere in the 3% range right now. So let's talk about first the idle cash at the bank person. Everyone needs an emergency fund and then liquidity is important. We understand that. But when we talk about, when we look at that return that you get for having money in those types of accounts relative to inflation, that's killing you if you've got money there. And we've, one of the most common situations we see is investors holding large sums of money in cash. Earning nothing. Talk to me about some of the pitfalls of folks who are holding large piles of cash at the bank.

You know, this one, you know, we sit here and scratch our head at not only the number of people who have significant balances at the bank, but the amount of significant balances that they have at the bank in accounts that are under-earning or aren't earning very much. So it's a very common problem. You can kind of see that in the housing data where there's a certain amount of housing transactions every year that are done in all cash. So, you know, people are holding cash. Yes. And there are some downsides to holding cash. Let's talk about a few of them. One of them you just mentioned, inflation. You know, if my inflation is 3%, but I'm earning less than 1%, then, you know, I'm falling behind every year. My example, 2.5%. So I have $5 million. And I have it at the bank, you know, my purchasing power goes down by about $25,000 a year because I haven't kept up with inflation. So falling behind is not inconsequential. It's a big deal. The bigger one, though, that I think because we're under-earning and we get used to under-earning, you know, the bigger problem is just the pattern setting that it sets, you know, because our most successful investors are those that are on top of their money and making their money work for them, or at least putting people in place who can watch the money for them.

Who's watching my money?

Who's watching my money? So if you're an investor and investor just has money sitting idly at the— at the bank with no reason for it and they're under-earning, it's probably not a good sign for other parts of their financial life. So that would be a big issue. But And then the other thing is just psychologically, you know, if I'm giving them— I'm basically paying the bank to hold my money. If they're paying me 0.5%, we know what the bank is earning on it, which is quite a bit more.

Getting that 4 that we were talking about.

But Brian, think about before COVID you know, COVID interest rates went to zero and that's when banks start paying us zero. But before then, we were earning some nominal amount on our money, and now we're not even earning that. So it's really a slap in the face because all of the banks back then, they said, well, we're not earning, so we can't pay. But now they can go to the Fed window and they can get 4% just by keeping the money at the Fed. That's free money without lending it out or taking any risk.

Right.

But they're still paying us point whatever. So all that extra margin, you're basically paying the bank to have an account there. Kind of expensive if you have a lot.

Yeah, I was thinking about this too, Nolan, is especially if you're not in retirement yet. So we talked that— we talk about accumulation phase. That's what that's called when you're still working. You know, we work with high net worth investors, high income investors. They make a lot of money. And think about if you just sock that away in a checking account or something. You're giving away time, really. So we're talking about what we're thinking about when we are doing retirement planning is how can we get your money to a point where you feel comfortable retiring? Well, if you sit there and make 0.07% on your money rather than, you know, maybe 6% that we could find in some sort of income security, you're giving away many years of your life that you're going to have to continue working, that you're not going to get to that magic number. Of retirement. So you may have safety, you certainly have safety having your money in some sort of an FDIC institution, but you're giving away years that you're going to have to continue to work where your money's not growing for you. So I wanted to make sure that we made that point. So that's people who have idle cash at the bank. There's two other types of people who need income. I'm sure there's other types, but these are the three that we look at. The second group of people who should pay close attention to income securities are people who need income. So either you're retired, you're approaching retirement, or you're funding some specific goal, whether it be a child's education or trying to buy a new home, whatever the case may be. Nolan, first of all, I'd ask you, can you give me a window into your experience with clients and the anxiety they feel when their focus shifts to trying to replace a paycheck that they had at work? But in retirement, that's not coming in anymore.

That's got to be a huge psychological hurdle. You know, as you know, we work with successful professionals from all walks of life. And most of our investors are hardworking, conscientious, good savers. They just been good investors, good Americans, you know, and they, they have done well over time. But they come to a certain point where they have earned money. They're used to getting a paycheck in every month. And at some point that has to stop. Normally it's retirement, but some people just end up with enough money where they don't have to continue work. So, you know, they are kind of just successfully not working anymore. And what that means is that now you need to start generating income from all of those assets that you've accumulated. My first experience with this is, you know, I had a client who came to me earlier, early in my career, and he had retired and they had him him and his family had invested in a concentrated stock portfolio. Basically, it was comp— it, it consisted of one big stock, which is about 80% of everything, and some smaller stocks. And he came to me and said he was with another firm. He said, Nolan, here's my portfolio. Now I'm not working anymore. I need you to get me $8,000 a month from this portfolio. And it was all stocks. And that was my first experience with income securities, seeing the need, the demand, and rolling up my sleeves to see how this can be accomplished, which was a seminal moment for me in my career because that client who started that sort of that income strategy and that income distribution, and this guy lived well and he actually spent that money that we generate every month. And, you know, he's no longer with us, but he really He really enjoyed it and his account did well even as he was spending. But it was an income portfolio and that was my first experience with it. But since then we've seen people who are pre-retirement with kind of that same need for whatever reason. I don't know if they're in the gig economy or a lot of people these days, you know, aren't in love with the idea of working in corporate America till 65. So we see a lot of people in their 50s and nowadays with the way the world is going with all of these influencers and media stars, you're starting to see people in crypto at earlier ages with the need for income. And so I think this is a big— this is a big issue. It's going to become more important as inflation continues to be an issue.

So we're looking to become influencers as well. That's the game plan here, Nolan, as we do these YouTube videos and everything else. But so I'm glad you brought up the example of your previous client because You know, what he would have had to do had he not spoken with you is he would have to sell that stock off over time in order to fund his, fund his lifestyle. Right. And there would have been some tax implications that came along with that and things along those lines. But can you contrast the approach of selling investments to fund expenses against the concept of letting your portfolio generate cash, kick off cash to pay those same expenses?

Yeah, I suspect that a lot of these people that have cash just sitting it's a conscious decision. And some percentage of those people, for whatever reason, don't want to be tied to the vicissitudes, the ups and downs of the stock market.

Right.

They just don't. It's probably not smart, particularly if it's— you have cash and it's for a specific purpose within a relatively short window, then stocks probably aren't the right thing for you. And for anybody with substantial amount of cash, I'm sure they've had investments in the stock markets for many years. So you've kind of seen that we do have from time to time we have some recessions, we have corrections, the market goes up, but we know it also goes down a fair amount before it goes up. Yeah. And so that inconsistency, it just may not jive with a person's lifestyle. So I think, you know, when a person's no longer getting that steady paycheck and they're counting on kind of their own assets of what they've accumulated, they want a little bit more predictability.

Yeah.

And if I'm going to fund my lifestyle with stocks that are continually moving up and down, that might not be the best plan. So a lot of people are a little bit more interested in hearing about something that's not a 1-to-1 movement with the market. And if you have, say, for example, we're working with the client, Brian, that needs $10,000 a month. And, you know, imagine we have a portfolio for them and we have $2 million and we have all $2 million in an income sleeve, and that income sleeve generates $100,000 after fee per year for that client. Generally, that income stream is going to be independent of what happens in the stock market and corrections. There could be a little bit of movement in the price of those income securities, but by and large, the stream of income should not change. And even if there's a market sell-off or the market goes down, the client has $2 million in income securities, another $2 million in stocks. The stock portfolio will probably in a correction go down and the income securities in a correction will probably go— they could go down a little bit, probably not as much as the stocks that could go down a little bit, but the income should not— it should continue. And so what that means for a client now, they can ride out a correction and for a market recovery because they don't have to— they're not counting on their next month income stream based off of if Microsoft or Apple or Nvidia stock went up. It's just something that happens in their account. And so it can allow people a lot more flexibility. You know, if you have your all your bills covered with income securities, with my other money, maybe I can chase more growth and maybe you can give me a better total outlook. But that would be the reason why I think people are just a lot more comfortable with taking income from an income-generating investment instead of selling my growth investment at an unknown price to generate this income. Yeah.

So what we have in our, in our world is something called sequence of returns risk. So if someone retires and there are a few bad years in the market, say they've got all their money in stocks, well, that can really impact their picture going forward. And so what you're saying is take some of that money, put it in a fixed vehicle that fixes for all the, for all the bills that they need to pay. right? And then they don't have to worry so much about that sequence of returns risk. So that's kind of the way we look at for people who need income. You sort of talked and sort of referenced a little bit the third type of person that needs income securities, and those are the stock market reluctant investors. So Nolan, we have corrections in the market. We've had bear markets over the last hundreds of years, really. And every time there's a bear market, there's a subset of investors that never want to come back to the stock market again. And I understand there's a logical way of looking at investments, but there's also a psychological or emotional component to that. We understand sometimes people are just done with it and they don't want to deal with the stock market anymore. So there's a subset of investors out there who's been burned at some point within the past with stock investments. Many of them swear off of all investing because of past experience. We understand that emotional damage that has led many of these investors to park their money in cash. But as we said before, this can create real damage to your future purchasing power as well. So what do you say to these investors that have been burned in the stock market, Nolan? And what do you think about as an alternative course for them as well?

You know, I feel really bad for those people, you know, who got burned, that are swearing off the stock market. There, Brian, when you were a little kid growing up and you were first learning to ride a bike, did you ever fall?

No, never. Yes, a few times.

I certainly did. And when you fell the first time, what'd you do?

I got right back on that.

You ever swear off riding bicycles ever again?

I never did.

Yeah. So it's odd for these people. You know, a lot of these people, they went in to the market and clearly they lost money. It didn't go well. Maybe they invested the day before a correction. Correction happens. I fall off my bike and then they sell at the bottom and then they go, oh, I fall off my bike and I put the bike in the garage and I'm done with it forever. So it's really not the way things go. It's unfortunate that these people had kind of a bad experience, but I feel like they're losing twice. That's totally right, because markets go up over time. So what if you got in at a bad time? We know it's not timing, it's time in the market.

That's right.

Yeah. So if you get in at a bad time, that's unfortunate. The market goes down, that's unfortunate. You sell, that's unfortunate. And then the market goes back up. That's really—

and that really hurts.

Yes. So that's a problem. Just psychologically, that is a problem. So we feel bad for you. And if you're going to swear off stocks forever and you won't listen to reason, that's fine. Some of it, it kind of makes sense if you think about it. You know, if my If I'm just not built that way and it worries me when I turn on the news and hear the Dow was down 100 points or something, and I'm thinking over time the stock market gives me 10% return, but if I can do income securities and get 7 but not have to worry so much, for a lot of people, that's probably a good result. Okay.

So just as a, as an alternative. So sometimes people think of it in a binary way. So it's either all in on the stock market or all out. All in cash. So what we're saying is there's an alternative course in there somewhere, and that's income securities where you can get a nice return with a little bit less risk. And that's kind of what we're trying to stress with income security. So we've talked a lot in general about income securities. Let's talk in more specifics of the types of investments that we look at in the income securities world. So we're going to talk about 4 types of investments, Nolan. That's going to be corporate bonds. We're going to talk about high dividend stocks. We're going to talk about closed-end funds and preferred stocks. There are a few other types of income securities, but these are the types that we focus on here at Left Brain. So let's talk about the first one, corporate bonds. High yield is, is an area of corporate bonds that we've had a lot of success with over the years. Bonds aren't just for the risk-averse, Nolan. They can be the steady heartbeat of any portfolio. So We've got people who are full bore, all-in growth investors, but they still may have some income securities in their portfolio as well. Corporate bonds are one of the areas that we've spent some time on putting those sort of securities in our clients' portfolios over the years. For those of you who aren't familiar with what bonds are, so with stocks, there's a company that is worth, say, $1 billion and say there are you know, 10 million shares at $100 apiece. So every time you buy one share, you own one 10-millionth of the company. That's pretty straightforward. Bonds are a little bit different. Let's say a company needs to borrow $1 billion. They go out to the market, they go out to some bank and have them underwrite a bond offering for $1 billion. And then that bank cuts up little pieces of that loan and sells them to investors like us, and those are called bonds. So just to kind of put it in simplified terms, small enough pieces for individual investors to own them alone. So, Nolan, why did you start buying individual corporate bonds for clients and where do you think they fit in an income portfolio?

So I started buying them for clients because clients had need for income. And, you know, when I started buying, I remember my first bond I bought I think it's about the year 2000, first quarter of 2000, the 7% Target buy.

Okay.

And a 7% Hilton Hotels buy. And we just needed income. You know, clients needed income. And like I mentioned to you, I think clients are keen that, you know, hey, I own this Apple stock or Nvidia stock and it goes up, but, you know, I've got some bills to pay at the end of the month and this might not be the best way. And so bonds provide those two things for people. One is they provide consistency. You know, it's a promise to pay whoever we loan that money to. They promise us that they're going to pay us back not only at the end, our principal, but also our interest semi-annually. And so clients like that. It's predictable. And if you put those in the portfolio, you also get steadiness if you hold them to maturity and there are no defaults. And so I started doing corporate bonds because clients needed income. This was a big market. It's the most obvious place to go. And the reason that we focused, Brian, on high yield bonds when we first started is the yields were higher. And so it was just a natural place to start.

Yeah, absolutely. And it's interesting, I think, you know, for those of you who aren't familiar exactly with how bonds work and the mechanics of it, You mentioned about the promise to pay not only the principal payment but the interest as well. If they don't pay, then the company is essentially bankrupted itself.

Correct.

So you have a sense that if the company wants to stay in business, they better pay you or they're done. Correct. So that's, you know, for those of you who are looking for some assurances about how it works and how steady the payments are going to be, that's One way to look at it in simplified terms. So that's corporate bonds, high dividend stocks. So this is something we've been doing a lot more of lately since bonds have been a little less attractive over the last, say, 18 months or so. On high dividend stocks, some companies don't just share their profits, they share them predictably year after year. And that's in the form of what we call dividend payments. Dividend payments are a profit-sharing sort of payment that goes out to investors when companies have excess cash. These are the types of stocks we think belong in an income portfolio. Nolan, why is this an asset subset that we pursue for clients, and what are some of the ways that we manage risk of dividend payments continuing predictably?

You know, it's a really good topic to bring up, and I thought this would be maybe a good time for us to talk about kind of the risk level of these securities. So generally, when we're looking at investments, we do have to look at the probability that they won't work out. That they're volatile, quote unquote risky, or they may lose us money. Yeah. And if we have a risk scale that goes from 1 to 10 and we put Treasury, U.S. government obligations at a level 1, we're going to put the U.S. stock market at a level 8. I would put as a whole, I will put income securities between a 5 and a 6 in that scale. And I know the first category of income securities we spoke about was high yield bonds.

Yes, sir.

Or corporate bonds.

Corporate bonds is generally—

corporate bonds generally, they do have a risk rating, sort of like a report card. It goes from A to C. A's are better than C's. But in general, we're just talking the corporate bond market in general. If we're— I would give it a 4.

Yes.

For investment-grade quality bonds. For high-yield bonds, these are bonds that have a credit rating lower than triple B. I would give those— I would give them a 5 to 6 depending on the rating from a risk level. And now let's pick up where we left off with was high-dividend stocks. And I think when I look at this list of the other 3 that we're going to cover, I would put high-dividend stocks at the highest risk level at higher than the other 4 income securities. So if the last one we talked about were corporate bonds being between a 5 and a 6, I put high dividend stocks at probably a 7. Yeah.

And part of that is, is because when we look at the payment structure, so like you mentioned, bonds, they have to pay you. Dividend-paying stocks, they have some latitude to decrease their dividend payment to you. And so there's risk in that. And then, of course, risk of the price of the stock as well. So how do we manage that risk? So the big risk for income investors really is, is of course, if they're counting on a dividend payment and then that dividend payment stops, right? And then they don't have money to pay the light bill or what have you. How do we manage that risk? What do we think about? How do we think about that?

You know, you have to be careful with high yield dividend stocks, which is why I mentioned we gave them a 7. I think people hear the word dividend and stock and they immediately associate the word safe. And they're not synonyms because sometimes dividends can change. Dividends are a residue of a company's profits. So there are no profits. Generally, you're not going to have dividends. It's the opposite. We can have the same entity with different securities, with different results. I'll give you an example. A couple of weeks ago, Dow Chemical, the big, huge chemical giant, I think they might be the biggest chemical company here in the U.S. and probably the oldest. But 2 weeks ago they came out and cut their dividend in half. I think before it was a 9% dividend. They cut it in half. What do you think happened to the stock?

Had to just tank, right?

Got whacked. What do you think happened to the bond?

Probably went up.

Yeah, nothing happened with the bonds. This is a case where you can have a company, same company, they've issued a stock, they've issued a bond. They say we're not doing very well right now and because of it, we're going to cut back the amount of a dividend that we're giving to shareholders because the profits just aren't there. So if you're a shareholder and you own that high yield dividend stock, your dividend went down, your income went down, and also the asset value went down. Yeah, but if you own the Dow bond, nothing happened. You're still going to get paid at maturity and you're still going to get paid your interest every 6 months. And the price didn't change, right? So that gives you an example between, uh, the different securities. So with high-yield stocks, you have to watch the business. It's just like owning any other stock. It's not important that they pay a dividend. So it wouldn't be any different than my evaluation of Google or Amazon or Apple or anything else. Our revenue is going in the right direction, our profit's going in the right direction. What's happening with margins? What's happening with competition? Competition. And so I have to do watch a little bit more with those high dividend stocks just to make sure that the business is still healthy.

I'm going to add one thing to that too, Nolan, that we put into our evaluation process, which is the historical dividend. What have they done over the last 10, 20, 30 or more years, whatever is available for us to look at. There are some companies which are called dividend aristocrats. And these are companies that have increased their dividend every year for some number of years. So when you look at a company for their dividend, you can feel a little bit— now, again, it's not a guarantee, but you can feel a little bit better about a company that has historically either kept their dividend stable or increased the dividend over time, that they will continue to do so going forward if the business continues to thrive as well.

Yes, you get a lot of confidence from that. Perfect case in point is ExxonMobil, the largest energy company here in the U.S. Rockefeller started it over 100 years ago. But if you look at the dividend, you know, they paid that dividend every year for 60 years. And I think they've raised it every year for 60 years. So you can pretty much feel good and take that cash flow stream to the bank. There's other companies that have it. And just so the viewers are aware, to give you kind of level set what yields are on high dividend stocks or on dividend stocks as an example, the S&P right now, the overall market, the dividend rate's less than 2%. I think it's 1.6% or something. And the average dividend stock, if you pull it up, is probably going to be somewhere between 2% and 4%. If you're higher than 4%, it's what we call a high dividend stock. Or an income security, and it could be that way for a reason. The cutoff that we use for income securities here, 7% is what we're looking at. But a normal dividend for dividend stocks are generally 2 to 4% is what the yields are. But you're right, you want to look at dividend history. And then we also want to look at the history of increases. Have they raised the dividend? Because they pay me this money quarterly. That's fine. But there's a whole host of securities, you know, that we've looked at where they paid that same dividend for 8 years or 9 years. They haven't changed it. Very different than a company who has raised the amount that they pay us over time every, every year for 8 years. So those are the things we're looking for.

You mentioned that we do look at a number of these that are over 7. And it's interesting because there are some companies that have in their bylaws or, or by U.S. law that they have to pay some certain amount of their profits out in the form of dividends. And so that's why there are some that pay much higher dividends than do, you know, the average company. And so that's, that's the genesis of how we found some of those. And we continue to mine the markets looking for more of those. So if you have an interest in talking to us about income securities and where they fit in your portfolio, these are certainly some of the types of income securities that we want to discuss with you. We've got two other types. We'll, we'll breeze through those a little bit quick, more quickly. But before we do that, I do want to tease that we've got an income securities booklet coming out, Nolan, where we're going to talk about— we're going to put out a booklet with a lot of these same topics and a lot of, you know, some statistics and some other sidebar content that comes along with that. So we'll, we'll put that on the screen. We'll put the link down in the description and we will definitely we will definitely ask you to go ahead and download that. A lot of good information in that as well, Nolan. But with that being said, let's talk about the last two and then we'll kind of close things out a little bit here. Closed-end funds. So this is something that we've looked at over the last year or so. Just give me a few seconds on what do you look at, look for in closed-end funds and how do they fit into a portfolio?

I'm glad you brought this up. You know, earlier you were talking about bull bulletproofing somebody's income stream. And we're going through 4 categories of income securities, but there are many, many more. And the one that we just brought up, closed-end funds, is an example of something that's very expansive. You know, there are mutual funds, which I think most viewers are pretty familiar with, and I bet you 99.9% of the viewers are familiar with one type of mutual fund, which is the open-end mutual fund. And so that— what that means is if I have my money in this fund and I want my money back, I send in a request to that fund and that fund sends me my money back. They redeem my shares. I have the Fidelity 123 Fund, I want out, I send a request to Fidelity, Fidelity sends me my money and redeems my shares for me. In a closed-end fund, it's a little bit different. Yeah, some entity started the fund and it was— it is what it says. It's closed, meaning they issued a certain amount of shares. Let's imagine they issued 100 shares. The fund starts trading. No more shares are going to be issued. I own 10 shares. 10 other people, they also own— 9 other people own 10 shares. And so if one of us wants to sell our shares, we have to actually find somebody to sell them to because we're not selling them back to the fund sponsor. We have to find a secondary buyer to buy these, like our house. When I want to sell my home, I don't sell it back to the home builder. I have to find somebody else. And so because of that, it means negotiating with a private party and not having a central party to sell it back to. Sometimes the prices of these closed-end funds can be higher than the value of their assets or lower than the value of their assets. Also, closed-end funds have the ability to invest in different types of assets because I know I'm not going to get redemption requests for people sending me requests for their money back. I can invest in different type of investments with a longer holding period. And then the third thing is I can also borrow money. A lot of closed-end funds will control $1.30 in investments for every dollar they own. And so they generally, a lot of them generate more income.

Yes.

So we look at closed-end funds as income-generating vehicles that are also able to be purchased at a discount to their normal value. That's what closed-end funds are. And they are a, a security that I think can be a good part or significant part of a well-diversified income portfolio.

Okay. So that's closed-end funds. We'll go number 4, preferred stocks. This is something that's been around for a very long time. Tell me about what are preferred stocks and how we use them.

So again, I'm going to go back to the 99.9%. Most investors have heard of stocks. Generally, when they think of stocks, they think of common stocks. The corporations can issue an unbelievable number and type of security. Yes, the securities that they issue have a ranking order. Some of them rank higher in priority, some of them are lower. So as an example, when we were talking about Dow having a bad earnings release, one of their securities fell in price and the other one didn't fall. So it matters. And what preferred securities— companies issue a stock but it sits higher in the capital structure than common stock. What does that mean? That means if something goes wrong, the preferred stocks get paid first. And if there's income to be distributed, the company can decide whether or not to give the dividend to the common shareholders, but by contract they must pay the preferred shareholders. So it's a higher level of security. It's safer. It gets repaid first and the income is assured versus the common stock. Yeah.

So it's kind of a hybrid. It's got some characteristics of common stock and some characteristics of bonds. It sits in between those two in the capital structure, what we would call it in those companies. So those are the four. Those are corporate bonds, high dividend stocks, closed-end funds, and preferred stocks. Again, we're going to talk about all those in our Income Securities booklet. Let's talk about The fourth kind of meaty point we want to talk about, positioning for interest rate environments. So no income strategy is built for all seasons. Income securities are very sensitive to the direction of interest rates, and that's something that we've seen over many years in the market. We're going to put a graphic up on the screen. The prices and the interest rates of income securities are inversely correlated. So you'll see that from the seesaw graphic here on the screen. That means that income securities that benefit in falling rate environments are very different than those that work in rising rate environments. So again, something we're going to cover in the booklet, but we want to talk about, you know, as we said, this is 2025. We're talking about a potentially falling rate environment. In an environment like that, how do you approach building an income portfolio? Which types of securities are more favorable in that environment?

So in the falling rate environment, we want to buy things that are interest rate sensitive. You know, we're going to show this chart, this seesaw. Interest rates down, bond prices up, and then you get the, the reverse for the inverse. And interest rates falling is really good for pretty much all securities, but especially income securities because they're, they're interest rate based. So I think this environment that we're in now where the markets are pointing us to lower rates, I mean, the Federal Reserve Board have pretty much telegraphed. Yes. Lower rates. We know the White House has telegraphed they want lower rates. So things that are interest rate sensitive. And within that, Brian, things that have a longer duration or a longer maturity, meaning when rates are going low, 2-year securities are okay, 5-year securities are better, but 10-year securities are better still.

Yes.

And so we really want to leverage that as much as we can in a lower rate environment. The playbook is long duration and we want to buy things that are interest rate sensitive because we have ability. Then not only is our income worth more, you know, our 7% that we're getting, if interest rates are 4 and we're getting 7, we got a 3% spread. That's okay. But if we're getting 7 and interest rates fall to 2, now we have a 5% spread. That's even better. And so we want to lock that in for as long as possible. So long duration stuff generally works very well.

And so all the rate environment you're talking about locking in the income and that's a great point. And then it's also when you think about, let's say I bought a bond when interest rates were 5% and it's 5%. And then in your scenario, you talked about interest rates may be 2% in a couple of years. Well, in 2 years, my 5% bond is going to be much more attractive than any other new bond I could buy in that 2% environment. And so we're trying to illustrate why fixed-rate bonds tend to do really well in that falling rate environment. And then other things as well. Preferred shares tend to do well in that environment. Even high-dividend stocks are, are interesting in that environment. When we go up, say, from 5% to 2%, if a, if a company is paying a 4% dividend, that's going to look pretty good in a 2% environment. So Like you said, anything that pays some sort of a fixed payment structure is going to look pretty good in a, in a falling rate environment. Let's talk about the converse. So a rising or a neutral rate environment. So again, we don't want to date this because there are going to be different types of environments. You may find this video 3 or 4 years from now when rates are going back up. How do you approach income strategies when interest rates are going up?

One is The obvious thing is we want to do the opposite of what we were doing when the rates were coming down. So if rates were coming down and I wanted to lock in long term, if rates are going up, I want to be short. So I want to buy short-term securities. But the other thing is we mentioned we're building a diversified income stream.

That's right.

Some of my securities in there will respond well to rising rate environments. So again, if I have any floating rate securities, any bank loans that adjust, those will do fine. If I have things that are based off of commodities or hard assets in an inflationary environment, which is when rates are going up, they should do well. Real estate or REITs are an example of that. And so hard assets like pipelines and master limited partnerships. And so there are income securities for pretty much all weather environments. Okay.

And then in a neutral environment, how do you think about things?

You can be neutral, so you can have some of both in a neutral environment.

Yeah, I think it generally makes sense no matter what the environment is to have some diversification across those types of, of interest rate securities. Right. Just because we don't really know the, the direction of rates. I mean, we can have some sort of inkling of where it's headed, But, you know, 2 years from now, interest rates could be going up or going down. So we're putting together a portfolio. We have to be mindful of the possibilities of going higher and going lower. And so when we think about a neutral rate environment or any environment, really, there needs to be some diversification between floating and fixed rates, long-term and short-term, and things along those lines. And that's something that we do when we build portfolios here at Left Brain. So we'll talk about Finally, Section 5, which is how should you proceed if you don't have these things in place yet? So where does this leave you? If you've got cash sitting idle, if you need income you can count on, if you're looking for an alternative to the stock market roller coaster— roller coaster— income securities might deserve a closer look. So this is not about trying to make fast money in the markets. It's about building a reliable financial engine that runs in the background, giving you freedom, stability, and control. Imagine waking up knowing your portfolio is working for you, sending you cash income predictably on a monthly or quarterly basis, regardless, regardless of what the market's doing. That is how we look at income securities. They have fixed payments generally. Many of them do, or predictable payments or relatively predictable payments. And that's what we're looking for when we put together an income securities portfolio for those 3 different types of investors. That's people with idle cash at the bank, people that have income needs, and then people who are a little bit skittish about the stock market. With that being said, Noel, do you have any final thoughts before we close things down here?

Yeah, I like the way you wrap that up. But just two points I want to make. You mentioned diversification, and generally we're thinking diversification among different types of securities. But I think we can also have diversification among how we own those securities. So I can own some in my taxable account, which is if I have money at the bank and it comes over, it's going to be in a taxable brokerage account. But I also have— most investors have the majority of their money in retirement accounts. So I can be diversified and have some of my income securities in my— I can have some of my income securities in my retirement portfolio and some of my income securities in my taxable account. A lot of it is based off the my tax bracket, and all of these income securities have different tax characteristics. So if we have bonds, corporate bonds generate ordinary income. So if I make $100,000 a year, I'm receiving $10,000 in interest income from bonds, I have to pay taxes as if I made $110,000. So in my example, I may want to put my bonds, I may want to diversify and put those in my retirement account that shelters me from ordinary taxes. But some of these income securities that we're talking about, Brian, are very tax friendly. Some are tax free. Some are— a lot of them are just tax advantaged, meaning since instead of being taxed at my ordinary tax rate, I'm taxed at a lower rate, which is my low— my long-term capital gain slash dividend rate, which is either 0%, 15%, or 20%, which is much lower than the highest nominal tax bracket at 37%. And some investors, as we know, are lucky enough to be in a 0% capital gain dividend rate. Yeah. So tax advantages is the other thing that I wanted to mention. The tax characteristics of these income securities really can be used to investors' advantage if they take advantage of it.

That's a great point. So we're going to close it out there. Don't let your money nap at the bank.

That's the—

if you take anything away from this video, that's it. Put it to work with a plan, with safety and purpose. Make sure to like and subscribe the video if you found it useful and hit the bell for notifications. That helps others find it. You know, we're trying to build our network of left-brainers here, so help us out by doing that. And we want to make sure that you're aware of the next video. We're out every few weeks with these. And then comment below with your key takeaways or your favorite types of income investments. And I guarantee you, if you put a comment below, I'm going to respond to it unless it's way out of left field and then I'll delete it. But if that— with that being said, Like, like, share, subscribe, and comment. We want to be more of an interactive experience for you. But with that being said, thank you for being with us. Thanks to Nolan, and we'll see you next time on the next Fundamentals of Investing.

Ciao.