Retired? You crave income. A long Treasury bond pays 5%. Not enough to cover the bills. A Treasury fund shows up with a 10% yield. Tempting, isn’t it?

You are now entering the world of yield fantasies. Wall Street is happy to feed these fantasies, and to soak you in the process.

The true yield of an investment is what it can throw off, indefinitely, without any erosion of capital. The fruit, not the tree. It is only so much. There is no way to make it bigger. If you spend more than that, you are dipping into capital.

Evidence that people don’t understand this: the proliferation of funds with “income” in the name and double-digit payouts. Look closely at these things and you see that, one way or another, they are in effect handing investors their own capital back.

Herewith is a representative sample of funds with puffed-up payouts. For each there will be an explanation of the mechanics and a recommendation for an alternative course of action. Also below, seven stocks and preferreds with seemingly unsustainably high dividend payouts.

1. iShares TLT Premium Income

This exchange-traded fund owns a collection of Treasuries and then writes call options against them. Premiums collected on the options are dished out, alongside bond coupons, in monthly dividend checks. Over the past year, Morningstar reports, those payouts have summed to 10% of the share price. That’s double the yield on the bonds.

Option premiums are income, of a sort. But you are deluding yourself to think this is the kind of income you can safely spend. Bond prices fluctuate. When prices go down, the holder of a bond against which a call option has been written suffers that same price decline. When prices recover, the option writer does not recover; his bonds get called away.

There are good years to be writing calls and there are bad years, but a chronic covered-call investor is destined to see his capital erode. The expected erosion is equal to the premiums pocketed. That’s how markets work.

Several other bond ETFs have cropped up using this premium-income strategy. History is repeating.

Forty years ago there was an outpouring of Treasury funds inflating their reported yields by selling options. The Securities & Exchange Commission cracked down with a rule requiring the disclosure of a yield number that excludes option income. The enhanced-yield gimmickry fell into disrepute and went away for a long while.........

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