ETFs for Income and Yield

June 19th at 7:00am by Tom Lydon

Garnering income from a savings account can be about as easy as squeezing blood from a turnip, but there are ways around this. A portfolio of exchange traded funds can help investors boost income with as little risk as possible.

“The maximum yield you can get without risk of losing principal is 2.74%, which is the current yield on a 30-year Treasury bond. To get that yield, you’d have to hold the note for the entire 30 years. And, yes, you’d probably lose money to inflation. If you earn a higher rate than that, you’re taking more risk,” John Waggoner from USA Today wrote.

Exchange traded funds can be good income boosters because they are low-cost, leaving more principal to work with. When a fund earns 4% in interest from its holdings, you don’t want to give away a full percentage point to the fund company, explains Waggoner.

By piecing together an ETF portfolio with an allocation to both stocks and bonds, investors can be reassured they are properly diversified and not missing out on gains from either sector. [List of Diversified Bond ETFs]

Here is a sample portfolio from John Waggoner, which gives investors an income boost while keeping risk to a minimum:

Begin with about 10% allocated to these bond ETFs:

  • Vanguard Intermediate-term Bond ETF (NYSEArca: BIV)
  • iShares Barclays TIPS Bond (NYSEArca: TIP)

Add 15% to cover the corporate bond market:

  • SPDR Barclays Capital High Yield Bond (NYSEArca: JNK)

Add 15% with this ETF to cover large-cap, dividend players: [ETF Chart of the Day: Large-Cap Value]

  • WisdomTree Equity Income (NYSEArca: DHS)

Another 10% each to these income yielding ETFs for diversification:

  • Vanguard Utilities ETF (NYSEArca: VPU)
  • Vanguard REIT ETF (NYSEArca: VNQ)

The average cost of the ETFs: 0.23%, or $23 per $10,000 invested. The ETFs from Vanguard were selected due to their lower expense ratios and diversified portfolios. According to Waggoner, the sample portfolio has yielded about 4.35% over the past 12 months. [Comparing Dividend Yields in REIT ETFs]

Tisha Guerrero contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.