Ive written before about the remarkable flexibility of ETF investing.
With more than 2,000 ETFs trading on U.S. stock exchanges… you can assemble a portfolio of strategies to achieve almost any investment objective. ETFs allow you to bet on U.S. and foreign stocks, bonds, commodities or currencies – almost any asset class under the sun.
Say you believe in a market melt-up – that stocks are set to soar in the coming months. Well, you can increase your bets by investing in leveraged ETFs.
Say you believe the opposite – that the stock market is on the brink of a major collapse. ETFs allow you to profit handsomely by betting against markets.
It recently occurred to me, however, that I had yet to explore the crucial area of income investing.
In other words, how can ETFs provide you with a steady and reliable source of income? Below are three ETFs with very different income-generating strategies that do just that.
1. Dividend Aristocrats
When most investors want to generate income, they think first of buying high-dividend stocks.
This is harder than it looks. You need to do more than just identify companies that pay a high dividend. You also need to make sure they can keep paying it.
Enter the Dividend Aristocrats.
Dividend Aristocrats are S&P 500 companies that have increased dividends every year for at least 25 consecutive years. The good news is you dont need to invest in each of the 53 Dividend Aristocrats to make money from them.
Today, you can simply buy the ProShares S&P 500 Dividend Aristocrats ETF (CBOE: NOBL). This rock-solid dividend-paying ETF currently yields 2.3%.
2. Real Estate Investment Trusts
Real estate investment trusts (REITs) allow investors to buy shares in commercial real estate portfolios that receive income from a variety of properties.
Equity REITs lease space and collect rents on the properties. They then distribute that income as dividends to shareholders.
Mortgage REITs lend money to real estate owners and operators through mortgages and loans or mortgage-backed securities. With more than 225 publicly traded REITs in the U.S., its tough to separate the wheat from the chaff.
The Vanguard Real Estate ETF (VNQ) does just that by investing in the small cap, midcap and large cap segments of the equity REIT market. Its low fees, 4.2% dividend yield and low correlation to the stock market make it a favorite among income investors.
3. Municipal Bonds
Municipal bonds are issued by a state, municipality or county to fund critical local projects, such as schools, highways and bridges. A general obligation bond is issued by government entities and not backed by revenue from a specific project, such as a toll road.
A revenue bond pays principal and interest through the issuer and is funded by sales, fuel, hotel occupancy or other taxes.
As investment-grade securities, municipal bonds are often less risky than corporate bonds.
Municipal bonds are exempt from federal taxes and most state and local taxes. That makes them especially attractive to investors in high-income tax brackets.
The biggest downside of municipal bonds is that they are illiquid. Offering a tax-free yield of 5.6%, the PIMCO Municipal Income II ETF (PML) offers a terrific alternative to investing in municipal bonds directly.
A Diverse Source of Income
Of course, there are many other strategies to generate income for your portfolio. These include investing in master limited partnerships, high-yield bonds or preferred stock, or even selling options.
Heres the challenge: To assemble and monitor a portfolio of investments that covers such a wide range of income sources takes more hours than there are in a day.
But as Ive demonstrated, the good news is there are ETFs for each… And you can invest in them at the click of a mouse.
Investing in a diverse portfolio of income-generating strategies has two additional benefits…
First, you generate much higher income than you would by, say, investing in an S&P 500 index fund. A model ETF income portfolio I track daily yields 6%. Thats more than triple the current 1.9% yield on the S&P 500.
Second, by investing in a portfolio of diverse strategies, you ensure youre not betting on a single source of income. That means youre virtually assured of generating income no matter the state of the market.
The bottom line? ETFs allow you to look beyond the conventional strategies of generating steady income in your portfolio.
Retire Rich on One $3 Stock [sponsor]
Picture the perfect stock for a moment. What would it look like?
It would probably be a leader in cutting-edge technology like smartphones, robotics, e-commerce and medical equipment.
It would have tens of thousands of unbreakable patents.
It would pay an enormous dividend.
It would be on the verge of dozens of blockbuster announcements that would send the stock higher and higher.
And most of all... It would trade ultra-cheap - less than $3.