For investors seeking to generate income from their portfolios, such as retirees, a popular strategy is the 4% rule. This guideline suggests withdrawing 4% of your portfolio in the first year of retirement, then adjusting this amount for inflation in subsequent years.
This approach, grounded in research, aims to minimize the risk of depleting one’s savings over the course of retirement. To achieve the necessary income distributions outlined by the 4% rule, investors have several strategies at their disposal.
Options include selecting dividend stocks with yields of 4% or higher, setting up a bond ladder with securities maturing each year for consistent income, periodically selling shares from non-dividend-paying companies or even purchasing an annuity. These methods can be used in isolation or combined to create a diversified income strategy.
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Alternatively, investors can simplify the income generation process by investing in professionally managed exchange-traded funds, or ETFs, that specialize in providing high-yield income.
These ETFs can hold income-generating assets, such as dividend stocks, preferred shares, corporate bonds, real estate investment trusts (REITs) and master limited partnerships (MLPs). They offer the advantage of monthly yields, which may be further enhanced by the use of options such as covered calls.
“Another key benefit of income ETFs compared to selecting a few individual companies is diversification, as they invest in a basket of income-generating assets that can help to mitigate risk and provide a more stable income stream,” says Rohan Reddy, director of research at Global X ETFs.
While the allure of high yields from these ETFs is undeniable, it’s crucial for investors to understand that these returns do not come without their own set of challenges. Many of these high-yield ETFs achieve their above-average yields through strategies that may result in muted share price appreciation and, consequently, total returns over time.
With that in mind, here are seven of the best high-yield ETFs for income investors today:
| ETF | Dividend yield (trailing 12 months) | Expense ratio |
| iShares Preferred and Income Securities ETF (ticker: PFF) | 6.4% | 0.46% |
| Global X Nasdaq 100 Covered Call ETF (QYLD) | 11.6% | 0.61% |
| Amplify CWP Enhanced Dividend Income ETF (DIVO) | 4.6% | 0.56% |
| JPMorgan Equity Premium Income ETF (JEPI) | 7.9% | 0.35% |
| Global X MLP & Energy Infrastructure ETF (MLPX) | 5.2% | 0.45% |
| SPDR Bloomberg High Yield Bond ETF (JNK) | 6.5% | 0.40% |
| iShares Mortgage Real Estate ETF (REM) | 10% | 0.48% |
iShares Preferred and Income Securities ETF (PFF)
“Preferred shares are an interesting ‘hybrid strategy’ — they sort of act like debt, but also move like equities,” says Derek Horstmeyer, professor of finance at George Mason University’s Costello College of Business. “If you want an income-generating asset class that has more risk than bonds but less risk than equities, they might appeal to you.” For exposure to preferred shares, investors can buy PFF.
This ETF holds a portfolio of preferred shares, largely issued by financial institutions but also some from blue-chip industrial and utility sector companies. At present, investors can expect an above-average 6.4% trailing-12-month yield, along with monthly distributions. The ETF paid a distribution of around $0.17 per share on March 1. PFF charges a 0.46% expense ratio.
Global X Nasdaq 100 Covered Call ETF (QYLD)
“Covered call ETFs invest in a diversified portfolio of stocks and sell, or ‘write,’ call options on the underlying individual companies or indices,” Reddy says. “The result is a regular income stream through the premiums received from selling call options.” Think of this type of ETF as an instrument that converts the future upside potential of its holdings into an immediate income stream.
Global X’s most popular covered call ETF is QYLD, which systematically sells monthly dated, at-the-money options on the Nasdaq-100 index covering 100% of its portfolio. Practically speaking, this means QYLD will lag the Nasdaq-100 during bull markets but produce high income potential due to the index’s high volatility. Investors can currently expect an 11.6% trailing 12-month yield and a 0.61% expense ratio.
Amplify CWP Enhanced Dividend Income ETF (DIVO)
QYLD is passively managed, meaning that it simply holds all the stocks comprising the Nasdaq-100 index and systematically sells the same covered call strategy month after month. For a more actively managed approach, investors can consider DIVO. This ETF begins by picking a concentrated portfolio of 20 to 25 blue-chip stocks with excellent cash flow, return on equity and earnings based on fundamental analysis.
Then, DIVO’s management team has the discretion to sell covered calls on individual holdings as opposed to the entire portfolio to ensure greater upside potential. The result is a lower distribution yield of 4.6%, but higher risk-adjusted returns, with DIVO outperforming the majority of its peer category to earn a rare five-star Morningstar rating. The ETF charges a 0.56% expense ratio.
JPMorgan Equity Premium Income ETF (JEPI)
One of the most popular actively managed ETFs on the U.S. market right now is the income-focused JEPI, which has attracted some $33 billion in assets under management, or AUM. This ETF is designed to target a total return similar to the S&P 500, but with lower volatility and enhanced monthly income potential. Like DIVO, it is actively managed, with JEPI’s team picking a select portfolio of stocks from the S&P 500.
However, JEPI differs from QYLD and DIVO with respect to how it achieves its covered call strategy. Because it does not hold all of the constituent S&P 500 stocks, the ETF relies on equity-linked notes to achieve synthetic exposure to the risk and returns of a covered call strategy. Currently, investors can expect a 7.9% trailing yield and a 0.35% expense ratio.
[READ: 8 Best Income ETFs to Buy in 2024]
Global X MLP & Energy Infrastructure ETF (MLPX)
Investing directly in MLPs can provide investors with enhanced income funded by midstream energy assets, but it can also result in tax headaches. This is because many MLPs are structured as limited partnerships, which pass their income, deductions, losses and credits through to their partners. For investors, this means the hassle of filling out a Schedule K-1 form come tax time.
To mitigate this, Global X offers MLPX, which not only holds MLPs but also general partners of MLPs along with regular corporations that are involved in energy infrastructure, such as pipelines and storage facilities. The current portfolio of 25 holdings, including Williams Cos. Inc. (WMB), Oneok Inc. (OKE) and Enbridge Inc. (ENB), produces a trailing-12-month yield of 5.2% and charges a 0.45% expense ratio.
SPDR Bloomberg High Yield Bond ETF (JNK)
A crucial mechanic of bonds to understand is their relationship with credit risk. In general, the more likely a bond issuer is to default, the higher the yield its bonds pay. The increased interest payments are meant to compensate investors who lend money to these issuers, who have a very real risk of not being able to pay the semi-annual coupons or initial investment back at maturity.
Because investing in high-yield bonds is so risky, investors may find it beneficial to diversify via an ETF. For example, the aptly named JNK holds a portfolio of 1,180 “junk bonds” tracking the Bloomberg High Yield Very Liquid Index, which provides ample diversification between different issuers. Investors can expect a high 6.5% trailing-12-month yield, along with monthly distributions, for a 0.4% expense ratio.
iShares Mortgage Real Estate ETF (REM)
Most investors are familiar with equity REITs, which are publicly traded trusts that own and operate real property in sectors ranging from residential, self-storage, warehouse, health care, commercial office and even retail. Because these REITs are required to pay out 90% of their taxable income, investors can benefit from high yields. However, there exists another type of REIT with even higher yields.
Enter the mortgage REIT, or mREIT. These entities primarily invest in mortgage-backed securities. They generate income by leveraging the spread, or difference between the interest income earned on their mortgage investments and the cost of their funding. Case in point, REM’s portfolio of 32 mREITs is currently paying a 10% trailing-12-month yield for a 0.48% expense ratio.
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7 High-Yield ETFs for Income Investors originally appeared on usnews.com
Update 03/18/24: This story was previously published at an earlier date and has been updated with new information.
