In my previous post (Being Overweight Can Be Good For Retirement Income) I outlined how certain sectors of the economy offer retirees the opportunity to generate extra income (or dividend yield). In the process, four main yield boosting sectors were identified: Utilities, Real Estate, Telecommunications, and Consumer Staples.
Since my previous article’s primary focus was on ETFs, here is a related strategy for overweighting these areas. Simply consider buying sector-based ETFs that represent each group:
- Utilities Sector SPDR ETF (XLU): Annual Yield = 3.19%
- Cons Staples Sector SPDR ETF (XLP): Annual Yield = 2.40%
- Vanguard REIT ETF (VNQ): Annual Yield = 3.60%
- Vanguard Telecomm Services ETF (VOX): Annual Yield = 2.66%.
By experimenting with differing allocations (or equal allocations) to each group, retirees should see an increase in annual income. For example, given a $100,000 portfolio in which 50% is allocated to a benchmark index like the S&P 500 (SPY), and 12.5% to each of the ancillary sectors, the portfolio’s yield would improve from 1.87% with SPY only to roughly 2.45% … a change of over a half-percent (58 basis points) or roughly $600 of annual income. Of course, there will be some added expenses for the extra holdings and trades, but still, a retiree could be pocketing an extra $500 annually.
Using ETFs such as these is a fairly easy way to diversify and overweight a portfolio. Yet, retirees may also want to consider using individual securities to accomplish the same goal. By selecting at least two or more of the most popular and steady yielders in each category, retirees can take that same 12.5% allocation to each sector and potentially give the portfolio another bump higher.
Utilities
Southern Company (SO) $6,250: Annual Yield 3.97%
Consolidated Edison (ED) $6,250: Annual Yield 3.56%
Telecommunications
AT&T (T) $6,250: Annual Yield 5.64%
Verizon (VZ) $6,250: Annual Yield 4.66%
Consumer Staples
Phillip Morris (PM) $6,250: Annual Yield 4.75%
General Mills (GIS) $6,250: Annual Yield 2.98%
Real Estate
Reality Income (O) $6,250: Annual Yield 3.98%
Health Care REIT (HCN) $6,250: Annual Yield 3.83%
In combination, the benchmark index (SPY) and these individual securities would yield just over 3%, producing an annual income of roughly $3,000 ($100,000 portfolio). That’s $1,100 more than the traditional benchmark SPY by itself, and another $500 above and beyond what the allocation to ETFs would provide.
Of course, retirees shouldn’t just run out and take sector positions like these without understanding all of the risks. By increasing allocations to these areas investors expose themselves to sector risk. If one of the aforementioned areas starts to decline or hits a rough patch, it would obviously take a toll on the overall portfolio. The same holds true for individual stocks. If one bad report or analyst downgrade pushes a company’s share price into negative territory, a retiree will likely feel it in their portfolio balance.
While no one wants to see their portfolio decline, one benefit for retirees is that when you switch your focus from growth to income, the principal balance doesn’t matter as much as the amount of income the portfolio produces. The more income a portfolio can produce, the more that can be withdrawn without tapping into principal… which is popular goal for both young retirees and those who wish to leave a financial legacy.
Overall, with interest rates at historic lows, and more and more retirees looking to pocket some additional income, the benefits of being overweight in certain categories may offer retirees a nicer payday, but at additional risk that must be managed and monitored.
Sources: Yahoo finance, CNBC, Morningstar: Disclosure: Long XLU, XLP, VNQ, ED, SO, T, VZ, PM, GIS, O, HCN
