by Bill Wysor | November 20, 2013 12:17 pm
For investors near or in retirement, investment income continues to be a tricky proposition.
Yes, there are individual stocks that offer attractively high yields, but often behind these yields are lurking problems. In some cases, yields are high as a result of a shrinking stock price — itself a product of a business that’s not very attractive in the first place. Meanwhile, most bond yields are just inadequate for generating meaningful income.
However, funds can help investors diversify some risk out of the equation while seeking income in a world weighed down by a zero-interest-rate policy.
Here are three funds to buy for income — a couple of ETFs that seek out income from stock dividends, as well as a mutual fund that takes a road less traveled to generate high income and some capital appreciation.
Essential services still are a compelling place for income-oriented investors. While there are challenges facing the utilities sector such as low growth, competition from renewable energy and regulatory concerns there is also much to like about the sector.
Simply put, our need for energy and its delivery to homes and businesses is not going away.
The Utilities SPDR (XLU) is an ETF option that allows investors to plug in to the largest and most successful names in the utility industry via a single holding.
This fund is full of high-quality names with sustainable dividends and products that we simply cannot live without. Top among XLU’s 31 holdings are Duke Energy (DUK), Dominion Resources (D), Next Era Energy (NEE), Southern Co. (SO) and Exelon (EXC).
Expenses are low at just 0.18% annually, or just $18 for every $10,000 invested. Meanwhile, the dividend should be attractive to retirement investors, at an SEC yield of 3.8% and a trailing 12-month yield of 3.9%.
For a more diversified option, retirement investors might consider the Vanguard High Dividend Yield ETF (VYM), which is squarely focused on large-cap names that pay above-average dividends.
VYM is classified as a large value fund, and it holds a number of high-quality stocks — ergo, this isn’t the place to find distressed companies with unsustainable yields. We’re talking about top holdings such as Exxon Mobil (XOM), General Electric (GE), Microsoft (MSFT), Johnson & Johnson (JNJ) and Chevron (CVX).
The 384-stock portfolio leans most heavily toward consumer goods, where it has a 15% stake, while 14% is currently invested in the industrials sector.
VYM’s results over time have been solid, with the ETF returning more than 17% annually during the past five years. That’s helped in part by a nice yield of 2.8% in the TTM (3.1% SEC), as well as a miniscule 0.1% expense ratio.
Fidelity Capital & Income (FAGIX) is a fund that combines high-yield bonds paired with a small allocation to equities to achieve fine results.
Managed by Mark Notkin since 2003, FAGIX relies on fundamental research to pinpoint opportunities in distressed companies. This Fidelity fund holds mostly corporate bonds, but mixes in some individual stocks to the tune of about 16% of the portfolio.
The results over time have been solid, with the fund up an annualized 18.7% over the past five years. This year, bond funds are up only slightly or even in negative territory, but FAGIX is up 7.6% YTD; its performance actually is correlated to the performance of equities over time.
Those results have attracted $9.7 billion in assets — more than either XLU and VYM.
The average maturity of the bond portfolio is 6.1 years and duration is 4.2 years. Current top holdings include debt from GMAC, HCA Holdings (HCA), Energy Future Holdings, Ally Financial (GOM) and Momentum Performance Materials.
FAGIX currently has a TTM yield of 4.9% and an SEC yield of 4.4%. Expenses are 0.73% annually.
Bill Wysor is the editor of The Relevant Investor. As of this writing, Bill Wysor was long FAGIX.
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