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Social Security pays retirees $2,000 a month on average, and private tuitions are even lower than that. If you are hungry for more income, dividend ETFs like the iShares 20+ Year Treasury Bond BuyWrite Strat ETF (BATS:TLTW), VanEck Mortgage REIT Income ETF (NYSEARCA:MORT), and Virtus InfraCap US Preferred Stock ETF (NYSEARCA:PFFA) can deliver more income.
These ETFs have very high yields and can complement whatever pension cash you get, often surpassing it.
It depends on how much you have saved up. The median retiree has up to $200,000 saved up before age 70, and this amount slowly declines over time as they draw on that income to meet their needs. You may have less or more than that, but you can allocate a portion of your savings into high-yield dividend ETFs, with the rest in the S&P 500 or elsewhere.
This barbell strategy could both grow your portfolio while handing you income. A 12% yield with a monthly distribution on $100,000 can hand you $1,000 a month. If you’re among the luckier ones with a portfolio of $500,000 or higher, you could get significantly more income than Social Security will ever provide through dividends alone.
Let’s take a look at these dividend ETFs.
iShares 20+ Year Treasury Bond BuyWrite Strat ETF (TLTW)
This is a covered-call ETF, but one that is worth owning in the current environment, because the underlying holdings are long-term U.S. Treasuries. These treasuries yield generously and are not susceptible to near-term interest rate fluctuations because they have 20-year-plus maturities.
This ETF targets the TLT ETF, and it then employs a covered call strategy to boost the yield. TLT is down due to interest rates being high, hence making long-term Treasuries worth less.
However, if interest rates go down suddenly due to a recession or otherwise, TLT can surge. During the Great Recession, TLT surged from $90 to over $120, and it surged again during and after the COVID recession until interest rates started going up. Moreover, interest rates are unlikely to climb from here, so I don’t see TLT falling further. This immediately negates a lot of the downside risk you have with covered call ETFs that struggle to recover afterwards.
All things considered, TLTW gives you a 13.6% dividend yield. The payout frequency is monthly, and your expense ratio is just 0.35%, or $35 per $10,000.
VanEck Mortgage REIT Income ETF (MORT)
The VanEck Mortgage REIT Income ETF is an income-focused fund that gives investors a single-ticket way to own a basket of U.S. mortgage real estate investment trusts.
I’m bullish on the real estate sector as it has seen significant improvement over the past few months, and the future looks bright for it. Interest rate hikes in the past few years were supposed to crush these companies, but what ended up happening was surprising. REITs not only survived, but many of them managed to keep increasing their dividends through rate hikes. This is likely because the industry drew on lessons from 2008 and was much more prepared this time around.
Anyhow, as interest rates ease, I see EFTs like MORT making a significant turnaround.
You get a 12.98% dividend yield with a 0.42% expense ratio. The dividend frequency is quarterly, but I can live with that due to all the positives.
Virtus InfraCap US Preferred Stock ETF (PFFA)
Preferred stocks have a par value, and most are trading under that par value today. These are securities that give you more priority if a business goes under, and they also come with generous yields. Companies issue these to not dilute their common stocks and raise cash more easily. Most investors are underweight on these preferred stocks.
It’s generally a good idea to avoid them if you see preferred trading at or near their par values. But when you can snap some up for cheaper, it’s worth doing so. That’s also what Benjamin Graham advised in his book about preferreds. They make sense when they’re trading at a discount.
This ETF holds a basket of these preferred stocks, and the ETF itself is trading at quite a discount right now. Compared to 2019 prices, PFFA is down some 21%.
You get a dividend yield of 9.69% with a monthly distribution. The expense ratio is 2.48% due to the leverage used, so the net yield is a little above 7%. That may look lower due to the higher dividend yields offered by the two other picks in this list, but it’s still worth it due to the upside potential it has once interest rates come down, and investors gravitate towards preferreds once more.