Retirement Income: Advisors Suggest These Funds

Retirement Income: Advisors Suggest These Funds

With or without a coronavirus pandemic, many investors still want income — especially retirement income — from their portfolios. The trouble is that it’s harder than ever to milk yield from securities without taking on lots of risk.


Interest rates remain at rock bottom.

To help investors who are looking for retirement income, we’ve got recommendations of income-oriented funds from top financial advisors, tailored for today’s perilous environment. These are mutual funds and ETFs that provide retirement income that’s above what you can expect from a popular, broad market benchmark.

And the advisors see these funds as relatively low risk at this time.

Each offers yield at least 50% higher than what you can get from SPDR S&P 500 ETF (SPY). SPY’s 30-day SEC yield is 1.99%, as of Thursday, according to Morningstar Direct. Its expense ratio is 0.09%.

Retirement Income Made Easier

“In today’s market where the 10-year Treasury note yields 0.70% and the S&P 500 yields less than 2%, investors should be extra cautious when finding yields above 4%,” said Paul Schatz, president of Heritage Capital in Woodbridge, Conn.

“Stocks, ETFs and mutual funds that yield more than 4% do so for a reason. And it’s typically not because things are going well for the companies. All equity sectors, especially those with higher yields saw carnage in the first quarter. Energy and banks were decimated. REITs were not far behind. Consumer staples and utilities much less so.”

Schatz warns individual investors to stay on their toes. An attractive, relatively low-risk, yield-oriented mutual fund or ETF today can turn south quickly, says Schatz, who is also treasurer of the National Association of Active Investment Managers (NAAIM).

“Published yield can end up being a mirage because companies may have declared their first-quarter or second-quarter dividend early,” Schatz said. “Then they might suspend it for the rest of 2020.”

The economic slowdown also weakens many companies’ financial fundamentals. “This has led to massive downgrades of corporate credit with the implied rate of default skyrocketing,” Schatz said.

That’s a good reason for using mutual funds and ETFs to obtain yield. They offer diversification. That cuts your risk from exposure to any individual security. So for investors seeking retirement income, we’re presenting advisors’ suggestions for funds that offer yield that’s at least 50% higher than SPY’s.

Still, be prepared to swap out of any fund with too many problematic holdings. As Schatz said, “Caveat emptor. Buyer beware.”

Retirement Income From Utilities

Utilities Select Sector SPDR ETF (XLU): recommended by Schatz.

  • Overview: “Most of the major utility ETFs looks very similar in terms of holdings, performance, yield and expenses,” Schatz said. “So if there isn’t much differentiation, I am a fan of buying the granddaddy with the largest asset base.” XLU has $11.2 billion in assets. A smaller utility ETF like Vanguard Utilities ETF (VPU) is $3.9 billion in size.
  • Pros: “The utility sector is largely defensive in nature and usually a good buffer to stock market volatility,” Schatz said. “Utilities typically perform better in questionable economic times than in a roaring economy. Utilities also behave better when interest rates are either low or trending down — the case now. Utility dividends are usually stable. There are few things more important to a customer than electricity and heat.”
  • Cons: “The biggest disadvantage is that while yields will likely not be cut, utility stock prices are unlikely to keep pace in this nascent bull market,” Schatz said. A collapse in share prices would mean negative total returns.
  • 30-day SEC yield: 3.44%
  • Expense ratio: 0.13%

An Income Bet On An Energy MLP Fund

Alerian MLP ETF (AMLP): recommended by Schatz.

  • Overview: Master limited partnerships (MLP) invest mainly in the energy sector, often in pipelines that delivery energy. The appeal of this ETF is its relatively high yield of 13.13%.
  • Pros: “The single biggest advantage (of MLP funds) is yields that can be fat and juicy, ranging from 5% to 20%,” Schatz said. That can boost the octane of your retirement income. “But remember, yields spike for a reason, and it’s never a good reason.”
  • Cons: Many investors say that MLPs do well regardless of the price of oil. But low prices signal lack of demand. That can mean less energy passing through pipelines, which hurts revenues. Current high yields from MLPs and MLP funds are the result of the collapse of oil demand and share prices. This ETF could see a sharp decline in dividends paid by MLPs. “The challenge is that we don’t yet know which of the MLPs will cut their dividends,” Schatz said. “AMLP is not for the faint of heart. Investors must accept the high level of volatility to gain the reward. The pandemic forced a generational collapse in oil that gave investors a once-in-a-thousand-year opportunity.”
  • 30-day SEC yield: 13.13%
  • Expense ratio: 0.87%

A Play On Sectors With Tailwinds

Vanguard Real Estate ETF (VNQ): recommended by Andy Kapyrin, co-head of investments, RegentAtlantic, in Morristown, N.J.

  • Overview: This ETF is a low-cost, diversified way to benefit from the U.S. real estate market.
  • Pros: The real estate investment trust (REIT) market in the U.S. owns a wide array of properties, ranging from e-commerce warehouses to cellular towers and data centers. “All of those are sectors that stand to benefit from long-term trends in the economy,” said Kapyrin. Those industries benefit from the work-at-home trend. That translates into rents that can provide retirement income.
  • Cons: While the fund is exposed to growing industries that stand to benefit from broad economic trends like e-commerce, “it’s important to note that about 10% of the fund is invested in REITs that own and manage office buildings, and another 10% in REITs focused on retail,” Kapyrin said. Office buildings may see lower demand because of the work-at-home trend. Brick-and-mortar retailers generally are losing market share to e-commerce retailers.
  • 12-month yield: 4.17%
  • Expense ratio: 0.12%

Retirement Income From Preferred Stocks

Pimco Preferred and Capital Securities Fund (PFINX): recommended by John Iammarino, president of Securus Financial, in San Diego.

  • Overview: This fund focuses on preferred stocks, which are hybrid securities. The key trait for anyone seeking retirement income is that preferreds pay dividends that are fixed like bond interest. But preferred shares appreciate in value more like common stock than bonds. This is a smaller fund for Pimco, but it can “leverage Pimco’s deep bond research team to identify attractive areas in the preferred securities market,” Iammarino said.
  • Pros: “Preferred stocks offer a higher yield than a company’s bonds,” Iammarino said. Their yield is dividend income, not interest income. If a company goes through liquidation, preferred shareholders and bondholders have rights to company assets before common stock owners. Also, preferred dividends take priority over common stock dividends, improving their safety, Iammarino says.
  • Cons: In today’s market, the last 12-months’ yield may not give you an accurate forecast of future yield. Also, Iammarino warns preferreds are relatively thinly traded, making them vulnerable to short-term volatility. And since many preferreds are from financial services stocks, a downturn in that sector could hurt preferred funds in general. And rising rates would hurt prices of preferreds that are issued without maturity dates like bonds and have fixed interest rates.
  • 30-day SEC yield: 4.39%
  • Expense ratio: 0.82%

Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about personal finance and strategies of the best mutual funds.


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