Don’t Sacrifice Safety for Income: Annaly Capital Management, Inc. (NLY), American Capital Agency Corp. (AGNC) and More

The whole-portfolio approach
In considering whether to replace low-yielding bonds and CDs with higher-risk investments like stocks, the key to making a smart decision is to focus less on individual securities and more on your overall allocation. In many cases, conservative investors were too conservative in focusing exclusively on risk-free CDs and bonds, as they gave up any prospect of growing their principal — something that’s increasingly important as lifespans get longer.

In that light, boosting stock exposure by investing in the relatively well-known dividend payers that Vanguard Dividend Appreciation ETF or iShares Dow Jones Select Dividend ETF own can lead to a less risky outcome in terms of increasing the odds that you won’t run out of money in retirement.

The reason these and similar ETFs are good choices is that they make it easy to get well-diversified exposure to income-producing stocks. Diversification keeps you from having to deal with the specific risks of individual securities, as you don’t have to worry that a failure in any single investment will lead to devastating losses. By contrast, if you simply pile into the hot income investment of the moment, you greatly increase the risk that you’ll be the one who suffers when the music stops.

Be as safe as you should be
Don’t let pressure to boost your income lead you to make bad investment choices. By making an informed decision about your overall portfolio risk, you can find a viable mix of stocks, bonds, and other investments that can get you to the goals you’re seeking.

The article Don’t Sacrifice Safety for Income originally appeared on Fool.com and is written by Dan Caplinger.

Fool contributor Dan Caplinger owns shares of Vanguard Dividend Appreciation and iShares Dow Jones Select Dividend ETFs. The Motley Fool owns shares of Annaly Capital Management (NYSE:NLY).

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