Retirement isn’t all just relaxation and worry-free days. One of the toughest challenges for retirees is finding enough income.
Retirees seeking income can find yield from funds that’s higher than what they can get from, say, an S&P 500 index fund. The real trick is to find market-beating yield with total return that does not steal back that income in the form of erosion of the fund’s share price.
Still, it can be done.
We asked leading financial advisors for pros and cons — especially for investors seeking retirement income — of three funds whose trailing 12-month (TTM) yields range from 2.4% to 9%.
You can hunt for funds with decent yield on your own. Use fund screens at any number of mutual fund complexes and other financial websites. Many will let you rank funds by yield.
The hard part is finding higher-yield funds whose net asset value does not melt, especially in a bear market like the current one, offsetting their seemingly generous yields.
Here’s your goal: You’re aiming for yield that’s higher than what you can get from an S&P 500 index fund. The $275.1 billion Vanguard 500 Index Fund (VFINX), for instance, has a trailing 12-month (TTM) yield of 1.37%.
So that’s your bogey. That’s what you’re trying to beat, without giving it all back in the form of negative return. Vanguard 500’s total return so far this year is negative 12.58%.
Here are three funds that advisors say shareholders ought to consider. Are they suitable for you given factors such as your risk tolerance and retirement income needs?
Dodge & Phelps Closed-End Fund
Duff & Phelps Select Income Fund (DNP):
- Fund size: $3.5 billion.
- TTM yield: 2.37%.
- Year-to-date (YTD) return: 7.66%.
- 3-year average annual return: 7.89%.
- Pros: DNP is a closed-end fund (CEF). Share price is based on market sentiment as well as supply and demand. So share price can be worth more — or less — than the per-share value of underlying assets. Also, the Federal Reserve is raising interest rates. “Even if the Fed eventually pauses in 2023, rates will stay elevated, which may offer a fantastic opportunity to lock in longer duration assets before a decline of rates, especially if a recession looms with the lag in monetary policy,” said Greg Zandlo, president of North East Asset Management. Finally, 82% of fund assets were at work in utilities and oil and gas transportation and production as of April 30. Zandlo expects natural gas prices to stay elevated as winter arrives.
- Cons: As a closed-end fund, DNP pays out interest and sometimes return of capital (ROC). ROC reduces the value of your investment. You can go to a website like CEFconnect.com to see exactly how much of each distribution consisted of long-term capital gain, short-term gain and ROC.
Low-Cost Vanguard Fund
Vanguard High Dividend Yield ETF (VYM):
- Fund size: $47.6 billion.
- TTM yield: 3.01%.
- Year-to-date (YTD) return: -2.63%.
- 3-year average annual return: 12.13%.
- Pros: “VYM is an ETF we often own for clients,” said Paul Schatz, president of Heritage Capital. Its year-to-date decline is much less than the broad market’s. “It has a reasonable yield and offered decent downside mitigation during the first half of 2022. Its long-term track record is solid.” In addition, Zandlo likes VYM’s low 0.06% expense ratio.
- Cons: Dividends are quarterly, Many investors prefer to receive retirement income monthly.
Higher Yield For Retirement, More Risk
JPMorgan Equity Premium Income ETF (JEPI):
- Fund size: $12.3 billion.
- TTM yield: 9.05%.
- Year-to-date (YTD) return: -3.91%.
- 2-year average annual return: 12.46%.
- Pros: The fund’s yield was more than double the size of the fund’s negative return so far this year. The fund pumps up its yield by using covered calls and equity-linked notes (ELNs). Basically, third-party investors pay the fund for the right to share-price appreciation of certain holdings beyond an agreed-to point. Those payments are income for the fund. Selling covered calls gives retail shareholders exposure to options without having to trade them directly, says Ray Prospero, partner advisor at AdvicePeriod.
- Cons: The fund opened May 20, 2020, so it does not have a long track record. Selling holdings’ potential price gains beyond a certain price point limits JEPI’s own potential appreciation. Also, ELNs can be costly and illiquid, Prospero says. Schatz does not like the complexity of covered calls and ELNs, especially for investors seeking retirement income. “Retirees are usually best suited in easy to understand investments,” he said.
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