Stocks to Augment a Fixed-Income Portfolio

BOLTING LANDING, N.Y. (Stockpickr) -- I am seeing huge panic on the part of retirees. The panic isn't due to the equity markets, which, when you look, are only off about 3% to 5% this year. (Those returns exclude nearly three quarters of dividends.) People of retirement age have seen plenty worse -- as well as better -- over the course of their lives.

The real panic is in fixed-income yields.

Simply put, retirees are seeing yields vaporize before their eyes. On a $1 million retirement account, a 1% drop in yields can mean $800 per month in lost income. Most retirees I speak to want to live off of income flows and pass on the principal to their beneficiaries, but lower yields could send them dipping into that fixed-income principal a bit. The best way is to do so is to sell long-dated paper with built-in capital gains before they evaporate and roll into short-dated paper.

I am seeing -- quite unexpectedly -- my fixed income books increase in size due to customer demand. Simply put, most retirees can't navigate this bond market. They need a professional to do so for them. The key is not to chase bond prices or expand duration. Rather, you have to be selective on the shorter end -- two to 10 years.

More importantly, augment the fixed-income portfolio with master limited partnerships or the widow and orphan stocks, which are the consistent high-yielders such as utilities and telcos.

I say augment, but be careful not to over indulge. Jim Cramer speaks about many of these stocks as the "accidental high-yielders."

Let me provide some examples of stocks I might include in this category that can replace some yield lost to declining interest rates.

Let's start with Verizon(VZ), a telecommunications giant that provides not only land line service but also wireless telephony and has spent billion of dollars over the last decade to lay fiber optic cables to homes in many locations.

Those capital expenditures are paying off. The company is now offering a bundled telephone, Internet and cable (high-definition, of course) package of services (sometimes referred as the "triple play" in the industry) to customers under the FiOS brand name. You can also add mobile telephone service for the family to the FiOS bundle.

Verizon pays an annual dividend of $1.90 per share, or about 6.50%. The company has debt issues, which are yielding far less than the dividend yield on the stock.

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