Retirement investors tend to be a conservative lot, yet with interest rates at all-time lows, it has become very challenging to remain true to conservative investing principles and yet also capture the yields necessary to keep up with inflation.
Fortunately, the bevy of ETF’s now available offer two great advantages. First, they offer high-yield opportunities that were previously difficult to come by. Second, they offer diversification. So while you may not feel great about taking on additional risk, rest assured these high-yield ETFs mitigate some of that risk.
Energy is a slam-dunk required holding in all long term portfolios. No matter what happens to economies or individual fortunes, the world will always need fossil fuel energy. The world literally comes to a halt without it. So with that in mind, you have tons of choices when it comes to investing in energy.
I have two choices here, and one is more risky than another. The safer bet is to just go with the Energy Select Sector SPDR Fund (NYSEArca: XLE). Here, you get exposure to the world-class energy names across most of the major subsectors. These are all companies with fantastic operations, great balance sheets, and tons of free cash flow. It yields 2.92%.
The riskier play is the Market Vectors Oil Services ETF (NYSE MKT: OIH). Oil services rely more on higher energy prices, and if they aren’t high enough, then these companies don’t get as much business. However, they have greater capital gains potential. The yield is 2.8%.
Preferred Stocks in ETFs
I am a huge fan of preferred stocks. As a stock-bond hybrid, they trade more like bonds, so their price tends to trade in a tight range. That eliminates most of the capital loss risk. It is extremely rare for a company with preferred stock to get so insolvent so as to be unable to pay its preferred dividends. With a diversified ETF, those odds decline even more.
I frankly see no reason to invest in bonds when preferred stock exists. The theoretical risk is higher but the practical risk is equivalent. In this case, you can go with either PowerShares Preferred ETF (NYSEArca: PGX), which yields 5.86%, or iShares U.S. Preferred Stock ETF (NYSEArca: PFF),which yields 6.01%. They are functionally equivalent.
Another intriguing choice is the Guggenheim Multi-Asset Income ETF (NYSE: CVY). There are many different securities that have high yields and they aren’t for everyone. However, this ETF puts them all together, providing both exposure and diversification. This includes preferred stocks, but also MLPs, mortgage REITs and closed-end funds. The result is a fund that’s yielded 6.66%.
It does, however, come with more risk because MLPs have been selling off lately and mortgage REITs are highly sensitive to interest rates. So year to date, the fund is down 8.6%. While it’s basically flat over five years, that doesn’t include dividends, so its total return is closer to 26%.
As far as diversification goes, it’s essential you have exposure to international stocks. That can scare some conservative investors, but that’s an overreaction. There are plenty of great international stocks, and many pay dividends.
You can avoid the fear of investing in single stocks by using an ETF like WisdomTree Global High Dividend Fund (NYSEArca: DEW). In fact, the top 10 holdings are all U.S. blue chip companies you know well, like Exxon Mobil (NYSE: XOM) and AT&T (NYSE: T). It yields 4.2%.