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If you’re a retiree or nearing retirement, you should be thinking about investments with steady income streams. Ideally, you’ll reinvest that income, but you also have the option of cashing out your dividends if needed. This passive income can supplement your retirement account withdrawals and Social Security. Some retirees will use dividends to cover ongoing costs such as housing and groceries.
Many individual stocks pay regular dividends, but retirees may want to buy exchange-traded funds (ETFs) since they offer diversification beyond the performance of a single company. Companies can reduce or even eliminate dividends in response to business needs and market conditions, so diversity offers protection, especially for anyone counting on dividends as part of their income stream.
ETFs are a smart choice because they offer that diversity. Plus, they typically have low management costs and tax advantages. Here are five income-producing ETFs that we like, with options for both stock and bond plays.
JPMorgan Equity Premium Income ETF (JEPI)
JEPI is one of the world’s largest actively managed ETFs. This fund invests in dividend-paying stocks represented in the S&P 500 Total Return Index, with an unusual options strategy layered on top. In addition to collecting dividends, managers use S&P 500 Index call options to generate monthly income.
The ETF is most heavily weighted in technology, healthcare, and industrials. Top holdings are Alphabet (GOOGL), Johnson & Johnson (JNJ), and AbbVie Inc. (ABBV).
- Yield: 8.15%
- NAV: 57.74
- Expense ratio: 0.35%
- PE ratio: 25.29
- Assets under management: $41.52 billion
Defiance S&P 500 Target Income ETF (SPYT)
This fund aims for a target annual income level of 20%. Its managers seek to derive this income from a sophisticated short-term options strategy. SPYT holds shares of ETFs that track the S&P 500, and sells daily credit call spreads. Essentially, the fund sells a call option while simultaneously buying another call option at a higher strike price for income generation.
- Yield: 20.87%
- NAV: 17.71
- Expense ratio: 0.87%
- PE ratio: 26.47
- Assets under management: $123.66 million
Global X SuperDividend ETF (SDIV)
SDIV is an international diversification play, investing in developed and emerging markets outside the U.S. The fund invests in 100 of the highest dividend-yielding equity securities in the world. There’s still some U.S. exposure, with 26.3% of holdings being American companies. The biggest non-U.S. countries represented are Brazil, Hong Kong, Britain, and South Africa.
The fund’s top sectors are financials, energy, real estate and materials.
- Yield: 9.59%
- NAV: 24.09
- Expense ratio: 0.58%
- PE ratio: 9.07
- Assets under management: $1.06 billion
Vanguard Total Bond Market Index Fund (BND)
This fund from Vanguard focuses on U.S. investment-grade bonds. It buys U.S. Treasuries and mortgage-backed securities of all maturities (short, medium, and long). About half of its holdings are issued by the U.S. Treasury or agencies, with 20% going to government mortgage-backed bonds and 14.5% going to industrials. Less than 4% come from foreign issuers.
- Yield: 3.78%
- NAV: 74.02
- Expense ratio: 0.03%
- PE ratio: NA
- Assets under management: $383.59 billion
Fidelity Municipal Bond Opportunities ETF (FMUB)
If you want a municipal bond play, Fidelity launched this ETF earlier this year to replace a muni bond mutual fund. In a survey of professionally managed investment portfolios, Fidelity found that inclusion of fixed income ETFs increased by 6% in the past year. Managers increasingly like the tax advantages, low costs and liquidity of ETFs.
FMUB invests at least 80% of its assets in municipal securities whose interest is exempt from federal income tax. The majority of those securities are considered investment-grade, but it may invest up to 30% of its assets in junk bonds.
- Yield: 3.27%
- NAV: 50.70
- Expense ratio: 0.3%
- PE ratio: NA
- Assets under management: $139.95 million
Why We’re Writing About ETFs
Exchange-traded funds are a low-cost way of investing in a bucket of investments. Professionally managed portfolios are increasingly using them for their tax advantages and easy liquidity. For retirees, there are many ETFs focused on producing passive income.