Often referred to as “Mr. Retirement,” Robert Powell is a long-time financial journalist...
Income Funds for the New Year
01/07/2016 9:00 am EST
If 2015 has taught us anything it’s that there is a high degree of risk in individual high yield sectors, cautions David Fabian, editor of Flexible Growth & Income Report.
My top income themes for 2016 center around large, diversified, and proven investment vehicles that circumvent the hit-or-miss proposition of individual sectors.
That may seem boring to those who like to tempt fate with the glory of a turnaround story or make assumptions in continued strength of momentum names.
Nevertheless, I think you will find these actively managed mutual funds and low cost ETFs offer attractive characteristics as core holdings for nearly every style of income investor.
Vanguard High Dividend Yield ETF (VYM)
If you are looking for an essential equity income fund to own in 2016, then VYM should near the top of your list. This ETF houses 435 US stocks with characteristics of consistently high dividend yields.
VYM has exposure to virtually every sector of the stock market, which means that it is a highly diversified and transparent investment vehicle. I like to think of this fund as the “S&P 500 of dividend stocks” because of its market-cap weighted structure and broad index construction methodology.
Currently VYM has a 30-day SEC yield of 3.25% and income is paid quarterly to shareholders. The embedded expense ratio of this fund is just 0.10% and it has over $11 billion in total assets.
I have owned this ETF as a core holding for several years and expect that it will continue to add value in 2016 as well. It’s simply difficult to find a better investment vehicle for those that crave a low cost, dividend-focused stock fund.
PIMCO Income Fund (PONDX)
This is one of my favorite actively-managed bond funds to supplement or replace existing passive strategies. Its strategy is built on the foundation of a flexible, multi-sector approach with the goal of income and long-term capital appreciation.
It takes a global slant by incorporating themes from overseas markets and has been known to use hedges to control risk and limit interest rate sensitivity as well.
The effective duration of PONDX is just 3.09 years and it has a current 30-day SEC yield of 3.03%. This fund has an admittedly higher expense ratio than a comparable ETF at 0.79%. But performance over the last several years has well compensated investors.
Over the last three years, PONDX has returned 17.02% versus just 4.02% in BND. The fund is rated 5-stars by Morningstar and has been consistently ensconced in the top of its peer group over the last three- and five-years.
I own this fund in my own account alongside my clients and feel that the managers’ expertise navigating credit and interest rate volatility will make for a solid bond holding in 2016.
Vanguard Wellesley Income Fund Admiral Shares (VWIAX)
For those seeking a conservative multi-asset income fund with a solid track record and low fees, look no further than VWIAX. True to the Vanguard approach of minimal cost, the expense ratio of VWIAX is only 0.18%.
The fund invests in a mix of income generating assets that fluctuate between 35-40% stocks and 60-65% bonds. The stock allocation consists of 59 large-cap names.
The bond sleeve consists of high quality corporate and government securities with an average maturity of 6.5 years. VWIAX has a current 30-day SEC yield of 2.83% and dividends are paid quarterly to shareholders.
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