Many retirees are exploring alternatives to the traditional 4% withdrawal rule, which involves withdrawing 4% of their investment portfolio annually to cover living expenses. As an alternative, income-generating exchange-traded funds (ETFs) present a viable option for generating monthly cash flow without the need to sell shares. Some of these ETFs offer yields exceeding 4%, allowing retirees to live off dividends instead. While high yields can provide immediate income, they may also come with lower potential returns, making them particularly suitable for those in retirement.
Top Income-Generating ETFs to Consider
The following income-generating ETFs offer various benefits and yields that can enhance monthly cash flow for retirees.
The Schwab U.S. Dividend Equity ETF (SCHD) maintains a 3.74% yield and has delivered an impressive 11.38% annualized return over the past decade. With a 0.060% expense ratio, this fund focuses on high-quality dividend-paying stocks. It manages approximately $73.0 billion in total assets across 102 holdings, including top companies like Chevron, ConocoPhillips, and Lockheed Martin.
Another option is the SPDR Portfolio S&P 500 High Dividend ETF (SPYD), which provides exposure to the top 80 high-dividend yielding companies within the S&P 500. With a trailing 12-month yield of 4.49% and an expense ratio of 0.07%, this ETF allows retirees to replicate the 4% withdrawal rule without selling any shares. Its top holdings include CVS Health, Viatris, and Invesco LTD, and it has achieved an annualized return of 8.92% over the past decade.
For those seeking a higher yield, the JPMorgan Equity Premium Income ETF (JEPI) stands out with an 8.35% yield. This ETF, which has a 0.35% expense ratio and manages $41 billion in assets, aims for monthly income distributions with reduced volatility. By incorporating defensive assets and writing call options on the S&P 500, JEPI has generated an annualized return of 9.90% since its inception in May 2020.
The Global X SuperDividend U.S. ETF (DIV) offers monthly distributions with a trailing yield of 7.49%. It has a higher expense ratio of 0.45% and manages approximately $653 million across 50 holdings. Although DIV is known for its low volatility, its annualized return is relatively modest at 3.57% over the past decade, making it a suitable choice primarily for retirees.
Finally, the iShares BB Rated Corporate Bond ETF (HYBB) features a trailing yield of 6.09% and a 0.25% expense ratio. This fund focuses on BB-rated corporate bonds, which carry more risk than higher-rated bonds but offer higher yields. HYBB is well-diversified with over 1,000 bond holdings and has produced an annualized return of 9.78% over the past three years.
Incorporating ETFs into Retirement Strategies
Income-generating ETFs can supplement cash flow, allowing retirees to rely on their investments without needing to liquidate assets. When constructing a retirement portfolio, it is crucial to consider individual risk tolerance and long-term financial objectives. While many retirees adhere to the 4% withdrawal rule, assessing whether this strategy aligns with personal financial comfort is essential.
Understanding dividend distribution schedules is also beneficial. By selecting ETFs with different payout dates, retirees can potentially ensure a steady stream of monthly income. Some may prefer ETFs that distribute dividends during the same months each year to maximize cash flow during those periods.
Additionally, retirees should be mindful of the tax implications associated with ETF distributions. Generally, dividends from equity ETFs are taxed at lower rates compared to bond ETF distributions, which are considered ordinary income. Evaluating one’s financial situation and goals is vital before adding income-generating ETFs to an investment portfolio.
In summary, as retirees seek to navigate their financial futures, understanding and utilizing income-generating ETFs can play a significant role in achieving a sustainable income stream. By carefully selecting the right funds and planning strategically, retirees can enhance their financial security in retirement.