When investors hang up their work boots for the last time, a portfolio that produces a solid, steady income is often high on their wish lists. Exchange-traded funds (ETFs) are great choices that generate strong yields with relatively little expense. Three ETFs worthy of consideration by retirees in search of high yields are: iShares U.S. Preferred Stock ETF (PFF 0.59%), Vanguard High Dividend Yield ETF (VYM 0.84%), and Alerian MLP ETF (AMLP 1.32%).
Steady as she goes
Tim Brugger (iShares U.S. Preferred Stock ETF): Since its inception in March of 2007, the iShares U.S. Preferred Stock ETF has demonstrated slow but steady appreciation to go along with its outstanding 5.67% dividend yield.
Preferred stock is somewhat of a hybrid between high-yield bonds and common stock. Like the latter, it offers ownership of a company. However, preferred stockholders generally don't have voting rights, though they are given precedence over common shareholders when it comes time to pay dividends.
The iShares ETF portfolio of preferred stocks spans 284 holdings, including some of the largest financial, telecom, and manufacturing providers in the United States. A majority of iShares' preferred stocks are financial, as is the case with the benchmark the ETF tracks, the S&P U.S. Preferred Stock Index.
For retirees in search of high yields but hesitant to invest in preferred stocks for fear of wild price swings, the iShares ETF offers a standard deviation of only 4.16%, which demonstrates it's considerably less risky than many common stocks. Standard deviation is a means of measuring the swings in a stock (or group of stocks in an ETF), and with this just over 4% in the iShares U.S. Preferred Stock ETF, shareholders can rest easy.
Minimal risk, diversification, a more than respectable management fee of .46%, and a whopping 5.67% dividend yield are why retirees would be wise to include iShares U.S. Preferred Stock ETF on a high-yield investment watch list.
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Broad exposure and a big yield
Keith Noonan (Vanguard High Dividend Yield ETF): Vanguard has emerged as a favorite in the ETF space, thanks to the low fees carried by most of its funds; its high-dividend offering should be a top candidate for those seeking low management expenses and strong income generation from a diversified range of stocks. The Vanguard High Dividend Yield ETF tracks the FTSE High Dividend Yield Index, which means that it aims to replicate the index's composition and results, and has closely mirrored that benchmark since its 2006 inception.
The ETF carries an 0.08% expense ratio, which means you'll pay an annual fee of just $0.80 for every $1,000 you have invested in the fund. Choosing a fund with low fees can make a big difference in performance over time, and according to the company, expenses for the Vanguard High Dividend Yield ETF are 92% lower than the average fund with similar holdings.
The fund packs a yield of roughly 3%, which is comfortably above the 1.9% yield of the S&P 500, and it bundles 404 dividend-paying stocks together as a single security, providing diversified exposure to a wide range of industries. Its biggest holdings by weight include Microsoft, Johnson & Johnson, ExxonMobil, and JPMorgan Chase, and the fund's ten largest holdings account for roughly 31% of the portfolio. Because many of its holdings are stable, mature companies in good position to continue growing their payouts, and it has a high level of overall diversification, the Vanguard High Dividend Yield ETF is a great low-risk vehicle for long-term investors seeking income generation.
Energize your portfolio with this ultra-high-yield ETF
Matt DiLallo: (Alerian MLP ETF): The Alerian MLP ETF invests in master limited partnerships (MLPs) that focus on owning energy-related infrastructure such as pipelines, storage facilities, and processing plants. Those toll-road-like assets typically generate predictable cash flow since customers sign long-term, fee-based contracts for capacity on those systems. Given that MLPs need to pay out a majority of their cash flow to maintain their favorable tax status, these entities often offer exceptionally high yields.
That said, there are a few drawbacks to investing directly in an MLP. First, an investor is taking on company-specific risk, which can lead to poor performance if the company stumbles. That has certainly been the case in recent years, since many MLPs have had to slash their distributions to investors due to issues arising from the oil market downturn. Another difficulty with MLPs is that each sends investors a Schedule K-1 at tax time, which adds complexity when filing taxes and makes these entities ineligible for many retirement-focused accounts.
However, retirees can skirt past those issues by investing in the Alerian MLP ETF. That's because this entity invests in a portfolio of MLPs that currently has 25 holdings; this diversification helps reduce some of that company-specific risk. And since it's an ETF instead of an MLP, Alerian sends investors a Form 1099 at tax time, which makes it eligible for most retirement accounts. These factors make the Alerian MLP ETF an excellent high-yield option for retirees, especially since it currently yields an attractive 10.2%.
