Generating passive income can help investors cover everyday expenses and achieve their retirement goals. Accumulating assets like stocks and real estate can lead to gains, but some funds aim to reward investors with steady cash distributions.
These funds have relatively high yields and can be a reliable source of income. Income funds tend to be less volatile than funds that focus on growth stocks. The trade-off is that during a bull market, income funds may underperform growth-oriented funds. But the flip side is that income funds tend to have more resilience during bearish markets.
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Some of these funds also incorporate options trading to increase total payouts. Fund managers in charge of these accounts typically sell calls on their existing positions to realize cash flow. Income funds that incorporate options trading tend to have higher expense ratios and yields compared with other income funds.
What Are Income Funds?
Income funds give investors exposure to various dividend stocks, most of which have high dividend yields. Income funds can also contain bonds that provide stable income.
The Financial Industry Regulatory Authority, or FINRA, offers a definition for mutual funds that also applies to income funds in particular: “Each mutual fund has a different investment objective. Some funds invest in a particular product, such as stocks or bonds. Some focus on a particular industry or region. Others seek to replicate a market index.”
Since income funds focus on cash flow, many of the assets in these funds are blue-chip companies. Established household names tend to have less risk than up-and-coming growth stocks with frothy valuations.
Why Investors Buy Income Funds
These funds don’t generate the highest returns you can get, and the distributions are subject to tax. However, many investors buy income funds because they seek portfolio diversification and dividends. Investors looking toward retirement can use cash flow from these funds to cover some of their expenses.
If you aren’t retiring anytime soon, you can reinvest dividends back into the fund so that you end up with more shares. The more shares you have, the more cash you receive from each distribution. Accumulating shares now can give you more choices in retirement, especially if you combine your income funds with other income sources like social security.
While investors can benefit from allocating a percentage of their portfolio to income funds, it’s important to choose the right funds for your portfolio. These are some of the top income funds to consider, all of which have a balance of solid ratings, decent to high yield and good long-term returns:
| Income Fund | 30-Day SEC Yield | Expense Ratio* |
| First Trust Morningstar Dividend Leaders Index ETF (ticker: FDL) | 4.2% | 0.45% |
| iShares Select Dividend ETF (DVY) | 3.8% | 0.38% |
| Nicholas Equity Income Fund (NSEIX) | 2.0% | 0.70% |
| Invesco High Yield Equity Dividend Achievers ETF (PEY) | 4.3% | 0.52% |
| Vanguard Equity Income Fund (VEIPX) | 2.5% | 0.27% |
| Vanguard High Dividend Yield ETF (VYM) | 2.7% | 0.06% |
| JPMorgan Equity Premium Income ETF (JEPI) | 6.4% | 0.35% |
| WisdomTree U.S. High Dividend Fund (DHS) | 3.7% | 0.38% |
*As of Aug. 29.
First Trust Morningstar Dividend Leaders Index ETF (FDL)
First Trust Morningstar Dividend Leaders Index ETF has $4.2 billion in assets under management and a 30-day SEC yield of 4.2%. The fund’s top three holdings are AbbVie Inc. (ABBV) (8.6%), Verizon Communications Inc. (VZ) (7.8%) and Chevron Corp. (CVX) (7.6%). The fund’s top three sectors are health care (20.6%), financial services (16.4%) and consumer staples (15.8%).
FDL has generated an annualized return of 11.3% over the past three years as of Aug. 29. The fund currently has 100 stock holdings and gets rebalanced quarterly and reconstituted annually. It excludes dividend-paying stocks that do not count as qualifying income, such as real estate investment trusts, or REITs. FDL has a 0.45% expense ratio.
iShares Select Dividend ETF (DVY)
The iShares Select Dividend ETF focuses on high-yield dividend stocks that have consistently paid their shareholders. The fund has 98 equity holdings, and the top three stocks are Altria Group Inc. (MO) (3.2%), Philip Morris International Inc. (PM) (2%) and AT&T Inc. (T) (1.9%). The smaller weights for the top three positions indicate they have a lower impact on the fund than FDL’s top three holdings.
DVY has a 0.38% expense ratio and a 30-day SEC yield of 3.8%. The fund has $19.8 billion in assets under management and uses the Dow Jones U.S. Select Dividend Index as its benchmark. The fund’s annualized total return over the past five years is 10.4% as of Aug. 29, and it has gained 15.2% year to date.
The top three sectors represented by DVY’s holdings are utilities (28.7%), financials (26.6%) and consumer staples (10.3%).
Nicholas Equity Income Fund (NSEIX)
Nicholas Equity Income Fund has been around since 1993, and it has collected $478.2 million in assets so far. The fund focuses on dividend-paying stocks and is managed by Michael Shelton and David Nicholas, both of whom have a large position in the fund. It requires a $500 minimum initial investment.
The fund looks for large value investments, and it has about 70 holdings. The top three sectors represented are health care (20.6%), financials (15.4%) and information technology (14.2%). The fund’s top three holdings are Microsoft Corp. (MSFT) (3.9%), JPMorgan Chase & Co. (JPM) (2.7%) and AstraZeneca PLC (AZN) (2.7%).
NSEIX has generated an annualized return of 10.8% over the past five years as of Aug. 29, and its 15-year average return is 11.7%. The fund has a 0.7% expense ratio and a trailing-12-month yield of about 2%.
Invesco High Yield Equity Dividend Achievers ETF (PEY)
Invesco High Yield Equity Dividend Achievers ETF has a trailing-12-month yield of 4.7% and uses the Nasdaq U.S. Dividend Achievers 50 Index as a benchmark. About 90% of the fund’s assets go toward dividend-paying stocks. The fund has a 0.52% expense ratio and has generated an annualized 9.8% return over the past decade as of Aug. 29.
The top three holdings of PEY are Altria Group (3.8%), First Interstate BancSystem Inc. (FIBK) (3.3%) and Cogent Communications Holdings Inc. (CCOI) (3.1%). Almost half of the company’s total assets are in small-cap stocks, and the fund has more assets allocated toward mid-cap stocks than large-cap stocks.
Vanguard Equity Income Fund (VEIPX)
Vanguard funds are known for having lower expense ratios than average, and this fund is no exception, compared with most of the other funds on this list. Vanguard Equity Income Fund has a 0.27% expense ratio but requires a $3,000 minimum investment. The fund focuses on large value dividend stocks and has generated an 11.8% annualized return over the past five years as of Aug. 29.
VEIPX holds 197 stocks, and the top three holdings are JPMorgan Chase, Broadcom Inc. (AVGO) and Johnson & Johnson (JNJ). The fund’s top three sectors are financials (20.9%), health care (14.1%) and industrials (11%). VEIPX is a large fund, with $57.8 billion in total net assets. It has a 30-day SEC yield of 2.5%.
Vanguard High Dividend Yield ETF (VYM)
Vanguard High Dividend Yield ETF focuses on large value stocks, and with $57.6 billion in assets under management spread across 551 holdings, it’s fairly diversified. The top three VYM holdings are Broadcom (4.2%), JPMorgan Chase (3.5%) and Exxon Mobil Corp. (XOM) (3.1%). VYM is the cheapest fund on this list, with a 0.06% expense ratio.
The fund’s top sectors are financials (21.3%), consumer staples (12.7%), technology (12.3%) and health care (12.3%). It also has a 12.2% allocation to industrial stocks. VYM pays out a quarterly dividend and has a 30-day SEC yield of 2.7%. The fund has an 11.4% annualized return over the past five years as of Aug. 29.
JPMorgan Equity Premium Income ETF (JEPI)
The JPMorgan Equity Premium Income ETF has a 0.35% expense ratio and a 6.4% 30-day SEC yield. Its trailing-12-month yield is even higher, at 7.2%. The fund has $35 billion in assets under management that are spread across 139 holdings. The fund sells out-of-the-money call options to reward investors with monthly distributions.
JEPI has generated a 7% annualized return over the past three years as of Aug. 29. The fund’s top three holdings are Progressive Corp. (PGR) (1.8%), Trane Technologies PLC (TT) (1.7%) and Meta Platforms Inc. (META) (1.6%). The fund’s top three sectors are information technology (19.8%), health care (15.8%) and industrials (13.1%). JEPI has a sky-high turnover rate, so today’s leaders in the lineup could be tomorrow’s followers.
WisdomTree U.S. High Dividend Fund (DHS)
WisdomTree U.S. High Dividend Fund has $1.1 billion in assets under management and a 0.38% expense ratio. The ETF has generated a 9.6% annualized return over the past five years as of Aug. 29. DHS spreads its assets across high-yielding dividend companies in the U.S., and investors receive quarterly distributions.
DHS’ top three holdings are Exxon Mobil (6.5%), AbbVie (5.8%) and Altria Group (5.1%). The fund’s top three sector allocations are in financials (25.2%), energy (17.2%) and utilities (14.4%). DHS has a 3.7% 30-day SEC yield.
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8 Top-Rated Income Funds to Buy in 2024 originally appeared on usnews.com
Update 08/30/24: This story was previously published at an earlier date and has been updated with new information.
