Building a long-lasting nest egg for retirement sure never gets any easier. It requires a continuous review of macro events — getting the Fed’s latest on QE is a great example — and being an active manager of your assets.
Investors looking to expand their holdings to ensure diversity across the board can do this easily by looking to funds, which allow you to play anything from certain stock sectors (XLU, XLK) to bonds (TLT) to the whole darn market (SPY).
Naturally, that means you’re exposed to a world of possibilities for income — again, be it through dividend-heavy sectors or debt securities. Thus a big key for long-term retirement planning is to jump into a few ETFs that provide differing sources of income, then use the power of compounding and reinvesting to make that cash grow.
Here are four income ETFs that I like right now to help you fund a comfortable retirement.
iShares S&P U.S. Preferred Stock Index Fund
30-Day SEC Yield: 5.8%
Expense Ratio: 0.48%
Preferred stocks are often referred to as “hybrid” securities, since they feature traits of both common stock and bonds. You can read more about them here, but the big takeaway is that this asset class is a dividend dynamo.
The iShares S&P U.S. Preferred Stock Index Fund (PFF) holds 97% of its $11 billion in assets in the preferred shares of more than 300 U.S.-based companies. While preferreds from banks and other financials like HSBC (HSBC) and Wells Fargo (WFC) make up the majority of the fund at 62%, General Motors (GM) preferred stock actually represents the ETF’s largest single holding at just under 3%. Real estate, insurance and utilities also have decent representation in the fund.
PFF is nice in that it pays out distributions on a monthly basis, not quarterly or annually, so strict cash-flow planners should enjoy that little bonus. It’s really nice in that it’s currently yielding almost 6% as of today’s prices. And while expenses aren’t the lowest you’ll find in the ETF world, they’re not bad at just 0.48%, or $48 on every $10,000 invested.
iShares DJ Select Dividend Fund
30-Day SEC Yield: 3.6%
Expense Ratio: 0.4%
The iShares DJ Select Dividend Fund (DVY) looks strictly toward the highest dividend-yielding stocks in the S&P 500 universe — for better or for worse.
DVY is a big, liquid fund with more than $12 billion in assets and volume of more than 1 million units traded daily. The fund’s 100 holdings are fairly conservative, including just under 30% of its assets in utilities, and skews toward large-cap stocks. Its current top positions are Lorillard (LO), Lockheed Martin (LMT) and Chevron (CVX) at 3.7%, 3% and 2.2% of the portfolio, respectively
Don’t confuse “high-dividend” stocks with laggards, however: The DVY has returned over 16% annually in the past three years, and is up 15% year-to-date, slightly edging the S&P 500. DVY makes distributions quarterly.
Vanguard Short-Term Corporate Bond ETF
30-Day SEC Yield: 1.4%
Expense Ratio: 0.12%
I know: I’ve pooh-poohed bond funds, and do prefer individual bond purchases instead. But for investors who have to be in bonds right now to tamp down risk exposure, it’s worth staking out a position in the Vanguard Short-Term Corporate Bond ETF (VCSH).
The returns on the VCSH aren’t amazing, especially after the fund plunged to a 52-week low amid uncertainty about Federal Reserve policies … of course, “plunged” has only been a difference of about 2%. But much like its price oscillations aren’t big, neither are its distributions — at 1.4%, VCSH actually yields less than the broader market or the 10-year T-note.
However, short-duration corporates are good as a long-term play thanks to their reduced interest-rate risk, and certainly aren’t going to be battered around nearly as much as Treasuries amid possibly rising interest rates and tapering to QE in the next year or so.
As is Vanguard’s style, expenses for VCSH are a very low 0.12%. VCSH makes distributions monthly.
PowerShares Active U.S. Real Estate Fund
30-Day SEC Yield: 3.1%
Expense Ratio: 0.8%
Helping to round out our diversification is an investment in the PowerShares Active U.S. Real Estate Fund (PSR), which invests in equity real estate investment trusts — tax-advantaged companies that must distribute at least 90% of their income to shareholders.
The $33 billion fund holds REITs across a nice spectrum of businesses. For instance, American Tower (AMT) holds cell phone tower assets, Public Storage (PSA) specializes in self-storage facilities, and Weyerhaeuser (WY) holds timber acreage.
PSR’s performance has been good, though not spectacular, averaging a 12% total return in the past three years, though a decent chunk recently has been torn away amid a bad month for most real estate and housing-related investments.
PowerShares Active U.S. Real Estate distributes quarterly.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he was long JNJ and GE.