I have had many requests from subscribers to my free email service to develop a portfolio without individual stocks, that could generate strong enough income for retirement, by investing in a diversified portfolio of ETFs and Mutual Funds.
As most of my readers know, I am not a fan of most ETFs or mutual funds, simply because I cannot control the ownership of individual stocks, nor do I like the fees associated with them or the total returns that most generate. They also tend to have many overlapping holdings that could cause some over-allocation. That being said, I have put together a group of investments that could make sense for many more "passive" investors.
The majority of these investments are for income, and while the total returns can be positive, that is NOT what I have focused on.
3 ETFs And A Mutual Fund For Retirement Income
I looked for investments that obviously offered strong dividend/distribution yields (not return of capital by the way), as well as being diversified across business sectors. I also included some bond investments because quite frankly, these investment vehicles are targeted toward those of us who want to "set it and forget it," and also have little desire to do the required research when developing a stock portfolio.
Let's delve into each investment and look "under the hood" a bit.
Market Vectors Mortgage REIT Income ETF (MORT)
(The data has been collected from Fidelity Investments)
The fund normally invests at least 80% of total assets in securities that comprise the fund's benchmark index. While publicly traded U.S. and non-U.S. mortgage real estate investment trusts ("REITs") that derive at least 50% of their revenues from mortgage-related activity are eligible for inclusion in the Mortgage REITs index. It is non-diversified.
Obviously what draws me to this ETF is the exposure to the mREIT sector. The fund has only 24 holdings and the one mREIT that has more allocation than the rest is my personal favorite, Annaly Capital (NLY)
|Top 10 Holdings|
Most are "household" names, and have been reviewed right here on Seeking Alpha extensively.
The fund itself has some basic attractive features:
- A current distribution yield* of 9.98%.
*Morningstar computes this figure by summing the trailing 12-month's "income distributions" and dividing the sum by the last month's ending NAV, plus any capital gains distributed over the same period. It does not reflect return of capital distributions. Morningstar defines "income distributions" as only including distributions related to interest payments by the fund's underlying fixed-income securities and dividend payments related to the fund's underlying equity securities.
- An expense ratio of .40%, which is lower than the vast majority of mutual funds.
- A relatively new ETF since mid 2011 with a total annual return of 13.75%.
- Dividends are paid quarterly and capital gains at the end of each year thus far.
First Trust DJ Global Select Dividend Index Fund (FGD)
The fund normally invests at least 90% of assets in common stocks that comprise the index or in depositary receipts representing securities in the index. The index universe consists of all dividend-paying companies in the Dow Jones World Developed Index which are subjected to eligibility screens for dividend quality and liquidity before being selected for inclusion in the index.
Global in nature, the fund is weighted towards the telecommunication sector outside of the USA, but does have a diversity of consumer staples, energy and healthcare, beyond the top 10 holdings.
|Top 10 Holdings|
Here are some of the basic features of this fund.
- A current distribution yield* of 4.85%.
- An expense ratio of just .60%
- Inception as of 2007 (terrible timing to open this ETF I would say) with a thre-year total annual return of 8.25% (prior to that, the global recession impacted all equity returns, but this investment still had a 1% return even during that period).
- Dividends are paid quarterly.
- With 101 holdings, there are no single stocks over allocated.
Powershares Insured NY Municipal Bond Portfolio (PZT)
The fund generally invests at least 80% of its total assets in insured municipal securities that are exempt from federal income tax, New York State income tax and New York City income tax and that comprise the underlying index. Qualifying securities must have a remaining term of at least 15 years to final maturity.
Selecting individual bonds has always driven me crazy, and when it comes to a portfolio of this nature, I believe a solid municipal bond assortment can offer some more security with less of a risk profile. The mix of bonds in the state of NY is compelling because being one of the wealthiest states in the nation, the risks of default are reduced.
|Top 10 Holdings|
|Bond Number/Detail||% Held|
|542690N32||LONG ISL PWR AT NY EL||11.61%|
|44420PDJ0||HUDSON YDS INFRA CORP NY||7.07%|
|59259YSJ9||METROPOLITAN TRANSN AUTH||6.13%|
|64971PJP1||NEW YORK NY CITY INDL||4.58%|
|794665AU3||SLS TAX ASST RECEIVABLE||4.44%|
|6499055X0||NEW YORK ST DORM ATRV||4.35%|
|44420PAB0||HUDSON YDS INFRA CORP NY||4.11%|
|745160QC8||PUERTO RICO AQUEDUCT-SWR||3.94%|
|64971PJA4||NEW YORK NY CITY INDL||3.78%|
|745181C54||PUERTO RICO CMWLTH||3.37%|
Here are some basic features of this fund.
- A current distribution yield* of 4.01%.
- A net expense ratio of only .28%
- Inception in late 2007, with a total annual return of 4.36%.
- Dividends are paid monthly.
- This is a "fixed income" class of investment that offers somewhat greater safety than either individual bonds or stocks.
Fidelity Strategic Dividend & Income Fund (FSDIX)
Using a neutral mix of approximately 50% common stocks, 15% REITs and other real estate related investments, 15% convertible securities, and 20% preferred stocks. Investing the fund's assets with a focus on equity securities that pay current dividends and show potential for capital appreciation, which tends to lead to investments in "value" stocks in the common stock category.
As my readers are all too aware of, I am very partial to large cap, best of breed, dividend winning stocks, that can produce regular income with an opportunity for some capital appreciation. The Team Alpha portfolio has a well diversified mix of these stocks, and has performed exceptionally over the last 15 months. (View this recent article)
As a result of my inclination for these types of investments, this particular mutual fund has a widespread mix of many of the stocks already in the Team Alpha portfolio.
|Top 10 Holdings|
|EXXON MOBIL CORP|
|PROCTER & GAMBLE CO|
|JOHNSON & JOHNSON|
|VERIZON COMMUNICATIONS INC|
|SIMON PPTY GROUP INC - REIT|
|MERCK & CO INC NEW|
|COCA COLA CO|
|% of Total Portfolio||18.54%|
Here are some basic features of this mutual fund.
- A current dividend yield of 2.40%.
- A net expense ratio of .81% which is reasonable for a mutual fund.
- Inception since 2003, with a total annual return of 6.42%.
- Dividends are paid monthly.
- Morningstar gives this mutual fund a 4 star rating (out of 5).
While the returns in this fund will most likely fall well below that of a stock portfolio of self selected equities, it does give passive investors an opportunity to derive good income, as well as capital appreciation from this mutual fund.
The Bottom Line
There are as many investor types as there are investment types. An equal weighting of dollars with these three ETFs and one mutual fund could generate roughly 5.10% in income derived from both dividends and capital gain distributions, as well as an approximate total annual return of roughly 8%.
While this pales in comparison to the returns that a dividend income stock investor can achieve (such as the 33% return in Team Alpha over 15 months), it can offer the passive investor a well diversified balance of investments that can produce slightly above average returns, with minimal attention required.
There are thousands of funds and ETFs to choose from, and I hope that we can generate enough interest in this article for everyone to offer their own suggestions. In that way, we can develop some sort of alternative "Team Alpha" portfolio for those investors with different financial profiles.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.