Income is the lifeblood of retirement, but by definition, once you quit working, your income will be coming from new sources -- like your portfolio. To cover your needs, you could regularly sell some assets, but for a number of reasons, many retirees don't see that as the most appealing option. That's why so many seek out high-yield dividend investments that provide steady streams of cash flow to their owners.
One difficulty with that strategy, though, is that many of those options carry higher levels of risk -- which is the bane of the retiree's portfolio. The trick, then, is to find high-yield investments that moderate that risk.
It isn't easy, but there are several excellent choices. One of the best is to buy an exchange-traded fund (ETF) that also sports a high yield, because these investments tend to spread out their bets -- and diversification reduces risk. We asked a trio of Foolish investors to pick their favorites in that category, and to explain why they recommend them. Their choices: iShares Preferred Stock Index ETF (NASDAQ:PFF), iShares Residential-Real Estate (NYSEMKT:REZ), and Vanguard REIT ETF (NYSEMKT:VNQ).
The low-cost way to nab a high yield in real estate
Matt DiLallo (Vanguard REIT ETF): Real estate investment trusts (REITs) are a great place to find high yields because these companies must distribute 90% of their earnings each year to investors. That said, with so many REITs to choose from, picking one can be a daunting task. That's why REIT ETFs are a great option because they're a one-stop shop for investing in the sector. One of the best of them, in my opinion, is the Vanguard REIT ETF, in part because its expense ratio is 90% lower than funds with similar holdings.
Those fees can really add up. As the following chart shows, the Vanguard REIT ETF currently sport a significantly higher yields than the similar iShares Cohen & Steers REIT ETF (NYSEMKT:ICF) and SPDR Dow Jones REIT ETF (NYSEMKT:RWR).
Over time, that yield differential can have a noticeable impact on an investor's total return. For example, let's assume that a $10,000 investment in a REIT ETF generates a 9% annualized return over the next decade. That hypothetical investment in an average fund with a 1.24% expense ratio would result in an investor paying $2,777 in fees over that 10-year period. Meanwhile, investors in the Vanguard REIT ETF would only pay $283 in fees. That makes the Vanguard REIT ETF a top-notch high-yield buy.
Rock solid income
Tim Brugger (iShares Preferred Stock Index ETF): Preferred stocks are a sometimes overlooked investment alternative, but there are several upsides to them, particularly for retirees in search of predictable income.
Preferred stock holders generally don't have voting rights; however, owners of preferred stock are entitled to dividend payouts before common shareholders, and those dividends -- certainly in the case of iShares Preferred Stock Index -- are akin to those one would get from a high-yield bond.
The iShares ETF differentiates itself from its peers in several ways: It's been around for over 10 years, its dividend yield is 5.6%, and with an asset management fee of just 0.46%, it is one of the least expensive around. That minimal fee means more of your funds are used to generate income rather than pay overhead, and the difference can be substantial.
With nearly $19 billion in assets that track the S&P 500 preferred stock index, the iShares Preferred Stock Index ETF is well diversified. For some perspective, its top holdings are two series of preferred stock from Wells Fargo (NYSE:WFC) with a $775 million combined ownership stake, yet they account for just 4.16% of the portfolio.
In addition to its impressive yield, it rarely undergoes wild swings in value. For example, in the past year, the iShares Preferred Stock Index ETF's share price has traded within a narrow range of $36.69 to a high of $40.34 a share. Minimal risk, outstanding income, and industry-low fees make this ETF a great alternative for retirees in search of income.
Let real estate do the heavy lifting for you
Brian Stoffel (iShares Residential Real-Estate): The trouble with ETFs that invest in dividend-paying stocks is that they are often very popular. That leads investors to bid up the price of ETF shares, thus lowering the relative payout. The secret, then, lies in finding under-followed ETFs that have exposure to stocks with large and reliable dividends.
In iShares Residential-Real Estate, we have an ETF that fits the bill. By buying shares, you get exposure to three key real estate segments in America: residential, healthcare, and storage. While many are worried about a slowdown in the real estate market right now, that has more to do with lack of supply than demand, which is good news for the companies that this ETF invests in.
To give you an idea, the ETF's three largest holdings -- which account for 25% of its portfolio -- are Public Storage (NYSE:PSA) and its eponymous storage locations; Avalon Bay Communities (NYSE:AVB) with its 75,000 apartment units across both New England and the West Coast; and Welltower (NYSE:HCN) and its network of senior and assisted living houses that are expected to experience booming demand as more and more baby boomers retire.
Currently yielding 4.6%, I believe this ETF deserves consideration as part of a well-balanced portfolio for any income-focused investor.