Top 3 Funds for Generating High Income in Retirement

Recently, I traveled to South Carolina to play in a pickleball tournament. While there, I met up with a friend that recently retired to the area. He and his wife are both 60 years old and in very good health. Their retirements could easily last 20 years, perhaps considerably longer.

Due to the nature of my work, it was not long before the inevitable question was asked: What is the best way to generate income in retirement when interest rates are so low? Of course, that is a loaded question since the best way for one person could be the wrong way for another.

For that reason, I answered that question by explaining how I would generate income for myself in retirement. That way, I’m not telling anyone else what to do. And what I would do in this market environment is own a portfolio of common and preferred stocks paying a high dividend yield.

There are two ways to accomplish that objective. You can either buy a mutual fund that does all the work for you or you can construct your own portfolio tailored to your specific needs. That is a lot of information to process, so in my next article I’ll provide a list of stocks that I would use as the foundation of an equity-income portfolio.

Today, I’ll examine three mutual funds that I particularly like for generating income in retirement. My parameters are straightforward: the fund must pay an annual dividend yield of at least 4%, have no up-front sale charge, and charge total annual fees and expenses of less than 0.5%.

iShares Preferred and Income Securities ETF

We spend so much time discussing common stocks that we sometimes forget about preferred stocks. Their upside potential is limited so they don’t excite growth investors. Also, they can be difficult to buy in small quantity so they trade infrequently. For that reason, I suggest owning shares of the iShares Preferred and Income Securities ETF (PFF) to participate in that market.

Over the past five years, the share price of this fund has gone exactly nowhere. Its only significant decline occurred 18 months ago when the initial outbreak of COVID-19 sent the financial markets into a tailspin. But the fund quickly recovered and is now trading higher now than before the pandemic. Its most recent monthly dividend payment of $0.151785 per share equates to a forward annual dividend yield of 4.6%.

Invesco S&P 500 BuyWrite ETF

Covered call writing is an options strategy that can generate much more income than what you can earn in dividends. It works like this: you buy shares of stock and then sell to someone else the right to buy that stock from you within a set timeframe for a specified price. That is exactly what the Invesco S&P 500 BuyWrite ETF (PBP) has been doing for the past 13 years with great success.

Calculating the annual dividend yield for this type of fund is tricky since the quarterly distributions reflect only the dividends paid by the stocks that it holds. Every December, the fund also pays a capital gains distribution that includes the net options premiums received and profits on sales of stocks. When those distributions are factored in, the total yield on this fund equates to roughly 12%.

iShares Emerging Markets Dividend ETF

The search for high-yield securities is not limited to the United States. In many countries, paying a generous dividend is regarded as the first duty of a publicly traded company. That is why the iShares Emerging Markets Dividend ETF (DVYE) does not include a single company domiciled in the United States.

The fund’s geographic dispersion is led by China (22%), followed by Russia (20%), Taiwan (13%), and Brazil (12%). Since many of its holdings make special dividend payments (similar to profit-sharing distributions), its quarterly cash dividend can vary widely from one quarter to the next. Nevertheless, its trailing 12-month dividend yield of 6.5% is very close to its 30-day SEC yield of 6.7%.

I’ll be the first to admit that my approach to generating income in retirement is not right for everyone. It requires patience and an above-average tolerance for volatility. In exchange, these three funds pay an average annual dividend and capital gain distribution of nearly 8%.

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