5 Best Income Funds for Retirement
Best Income Funds for Retirement
For decades, dividend stocks been playing a crucial role in helping retirement investors achieve their goals. However, not everyone wants to spend the time and effort researching individual stocks. For those that want a simple, worry-free approach to retirement investing, income funds could be worth considering. In this article, we are going to take a look at the best income funds for retirement.
Income Funds for 2017
To be more specific, we are going to look at exchange-traded funds, or ETFs. As the name suggests, one of the best features of ETFs is that they are listed on stock exchanges. They trade throughout the day and provide ample liquidity. Whether you want to buy or sell, all it takes is a few clicks on your computer screen or a phone call to your broker and the transaction will be completed.
And since we are talking about retirement investing, we will narrow our focus to ETFs that can provide a stream of income: dividend ETFs.
A dividend ETF typically consists of a portfolio of dividend-paying companies. Each dividend ETF will have its own distribution schedule. When companies in an ETF’s portfolio pay dividends, the fund collects them and then distributes them to shareholders according to that schedule. By investing in a dividend ETF, investors can expect to collect a steady stream of dividends.
Of course, individual stocks can also provide liquidity as well as a stream of income. One of the reasons why investors would still want to consider ETFs is that they provide a level of diversification. This is especially important to retirement investing, since if someone puts all their savings into one dividend stock, they are relying on one company to provide them with income. If that company gets into trouble and suspends its dividend payments, the investor would lose the entire income stream.
Dividend ETFs, on the other hand, hold tens if not hundreds of dividend-paying companies. Therefore, if one company can’t continue their dividend payment for whatever reason, the impact on an ETF investor’s income stream would likely be limited.
Moreover, many dividend ETFs track some sort of an index that gets rebalanced and reconstituted on a regular basis. The holdings of these index funds would also be adjusted to reflect the changes of the underlying indices. In other words, even though index funds are not actively managed like mutual funds, they are still maintained by professionals.
Note that when choosing the best income funds for retirees, you should take into account the management fees charged by the fund. With overall stock market dividend yields already near historical lows, you would not want to give a few extra percentage of return to portfolio managers.
Growth and Income Funds
It’s nice to have a steady stream of income, but it would be even better to have an increasing one. With rising inflation, higher prices will likely erode our purchasing power down the road.
The good news is that plenty of companies are capable of paying increasing dividends. If you can have a portfolio of these companies, you essentially have a growth and income fund. Moreover, since investors love rising payouts, a company capable of delivering higher dividends consistently will likely see its share price increase over time as well. In the list below, I have included two income funds that have a special focus on dividend growth.
Now let’s take an in-depth look at the five best income funds for retirement investors. For further reading on income investing ideas, you may also want to check out our columns on mutual funds and bond funds.
5 Best Retirement Income Funds
|Sr.No||Income Fund Name||Stock Exchange||Ticker Symbol||Management Expense Ratio (MER)||Dividend Yield|
|1||Powershares S&P 500 High Dividend Low Volatility Portfolio||NYSEARCA||SPHD||0.3%||3.72%|
|2||iShares U.S. Preferred Stock ETF||NASDAQ||PFF||0.47%||5.68%|
|3||PowerShares KBW Premium Yield Equity REIT Portfolio||NASDAQ||KBWY||0.35%||7.05%%|
|4||Vanguard Dividend Appreciation ETF||NYSEARCA||VIG||0.08%||2.06%|
|5||SPDR S&P Global Dividend ETF||NYSEARCA||WDIV||0.4%||3.51%|
#1 Powershares S&P 500 High Dividend Low Volatility Portfolio
The best income funds for retirees can be characterized by having a high dividend yield with relatively low volatility. As it turns out, one ETF provides exactly that: Powershares S&P 500 High Dividend Low Volatility Portfolio (NYSEARCA:SPDH).
SPDH ETF aims to track the investment results of the S&P 500 Low Volatility High Dividend Index. The index is designed specifically for yield-seeking income investors, as it includes 50 of the S&P 500 companies that provide high dividend yields with the least volatility.
As you would expect from a fund with the term “low volatility” in its name, SPDH ETF’s portfolio heavily overweighs defensive industries. Its three largest sectors are real estate (23.87%), utilities (18.79%), and consumer staples (10.89%). (Source: “SPHD – PowerShares S&P 500 High Dividend Low Volatility Portfolio,” Invesco, last accessed September 27, 2017.)
The fund charges an annual management fee of 0.3% and provides a dividend yield of 3.72%.
#2 iShares U.S. Preferred Stock ETF
High-yield stocks are not known to be the safest bets. Sometimes, the reason why a company can offer a high dividend yield is simply that its share price plunged, which in turn could reflect investors’ concerns about dividend safety. For retirement investors looking to generate a long-term income stream, it would not be a good idea to put money in companies that might cut their payout soon.
This high-yield income fund, however, deserves the attention of investors, even those with more conservative risk profiles.
I’m talking about iShares U.S. Preferred Stock ETF (NASDAQ:PFF). At the current price, the fund offers an annual dividend yield of 5.68%.
To put it in perspective, the average S&P 500 company pays less than two percent at the moment. Moreover, while most dividend-paying companies distribute every quarter, PFF ETF pays dividends every month.
And unlike many high-dividend stocks, this high-yield ETF actually provides a solid level of dividend safety. And that’s because the fund focuses exclusively on preferred shares.
When people talk about stocks, they are usually referring to common shares. Preferred shares, on the other hand, have a higher claim on a company’s assets and earnings. And when it comes to dividends, companies have to pay their preferred shareholders before they can pay their common stock investors.
iShares U.S. Preferred Stock ETF is an index fund. It tracks the S&P U.S. Preferred Stock Index and charges a management expense ratio of 0.47%. Right now it has 284 holdings, with the largest three being preferred shares from Wells Fargo & Co (NYSE:WFC), HSBC Holdings plc (NYSE:HSBC), and Allergan plc (NYSE:AGN). (Source: “iShares U.S. Preferred Stock ETF,” iShares, last accessed September 27, 2017.)
#3 PowerShares KBW Premium Yield Equity REIT Portfolio
Just like PFF ETF, PowerShares KBW Premium Yield Equity REIT Portfolio (NASDAQ:KBWY) pays monthly dividends. And its payout is even higher at 7.05%.
As the name suggests, KBWY ETF is a portfolio of real estate investment trusts (REITs). To be more specific, it focuses on equity REITs, which are companies that invest in physical properties rather than in mortgages. Equity REITs collect rental income by leasing out their properties. And since many tenants pay rent on a monthly basis, these real estate companies can afford to pay monthly dividends.
The income fund tracks the KBW NASDAQ Premium Yield Equity REIT Index, which is a dividend yield weighted index that consists of 24 to 40 small- and mid-cap equity REITs based in the U.S. The fund has an expense ratio of 0.35%. (Source: “KBWY – PowerShares KBW Premium Yield Equity REIT Portfolio,” Invesco, last accessed September 27, 2017.)
Right now, the portfolio consists of 29 equity REITs. Its three largest holdings are CBL & Associates Properties Inc (NYSE:CBL), Washington Prime Group Inc (NYSE:WPG), and New Senior Investment Group Inc (NYSE:SNR). Just like the index, the fund is rebalanced and reconstituted every quarter.
Investors who want to earn a monthly income from real estate should seriously consider KBWY ETF. The fund pays a steady dividend, with the distribution date usually being at the end of the every month.
#4 Vanguard Dividend Appreciation ETF
For those that want an income fund that also provides payout growth, Vanguard Dividend Appreciation ETF (NYSEARCA:VIG) should be near the top of their list.
VIG ETF holds a group of companies known for paying increasing dividends year after year. In particular, it tracks the NASDAQ U.S. Dividend Achievers Select Index, which is comprised of companies with at least 10 consecutive years of annual dividend increases. The fund’s holdings include many familiar names to dividend growth investors, such as Johnson & Johnson (NYSE:JNJ), PepsiCo Inc (NYSE:PEP), and Microsoft Corporation (NASDAQ: MSFT). (Source: “Vanguard Dividend Appreciation ETF,” Vanguard, last accessed September 27, 2017.)
The fund pays quarterly dividends with an annual yield of 2.06%. Because it follows a “passively managed, full replication approach,” VIG ETF has an expense ratio of just 0.08%, which is 92% lower than the average expense ratio of funds with similar holdings.
#5 SPDR S&P Global Dividend ETF
So far, the income funds we looked at consisted of mostly U.S. companies. But that doesn’t mean retirement investors can’t have some exposure to international stocks. SPDR S&P Global Dividend ETF (NYSEARCA:WDIV), for instance, is an exchange-traded fund that specializes in international dividend growth companies.
WDIV ETF tracks the S&P Global Dividend Aristocrats Index. The index is designed to measure the performance of the highest-yielding names in the S&P Global Broad Market Index that have been paying steady or increasing dividends for a minimum of 10 consecutive years. The fund currently holds 99 stocks and charges a management fee of 0.4%. (Source: “SPDR S&P Global Dividend ETF,” State Street Global Advisor, last accessed September 27, 2017.)
Because U.S.-based dividend growth stocks are highly sought after, they are not known for providing high yields. This international dividend ETF, on the other hand, offers investors a handsome yield of 3.51%.