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All Contents © 2017The Kiplinger Washington Editors
By Aaron Levitt
| October 2017
When you play baseball, some things are just essential pieces of equipment. You need a bat, a glove and perhaps, even the game’s namesake hat. You really can’t play the game without them. When it comes to retirement, some investments are also just essentials.
Some asset classes, exchange-traded funds (ETFs), mutual funds and even individual securities are standard issue and they belong in almost every retirement investor’s portfolio. From dividends to inflation protection, these are the building blocks on which all great retirement portfolios are built. Without them, you might as well pack in the towel and go home.
But with countless options available, how do you separate the wheat from the chaff? Luckily, we here at InvestorPlace have you covered.
Here are seven investments every retirement investor should own.
Prices and data are from the original InvestorPlace story published on September 1, 2017. Click on ticker-symbol links in each slide for current prices and more.
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
Expense ratio: 0.08% or $8 per $10,000 invested
It’s no secret that dividends are a retirement investor’s best friend. For one thing, they have accounted for more than 40% of the S&P 500’s total return since the 1930’s.
But dividends can also provide plenty of much needed income to those investors in their golden years. That makes dividends one of retirement’s essentials.
And the iShares Core High Dividend ETF (HDV) makes a great first stop for investors looking to add a dose of dividend stocks.
HDV tracks the Morningstar Dividend Yield Focus Index, which is a measure of U.S. firms that pay above average dividends. However, the ETF isn’t just about a large headline yield. The fund takes it one step further by using various screens to eliminate dividend stocks without significant economic moats or with lower-than-average returns on capital.
These factors create a portfolio of 75 of the “best” and strongest high-yielding dividend stocks in the U.S. Top holdings for HDV, including tech giant Cisco Systems, Inc. (CSCO) and energy leader Exxon Mobil Corporation (XOM).
This focus on high yield plus quality creates a market-beating 3.40% SEC yield for the ETF. Even better has been the fund’s annual total return of over 12.24% since its launch back in 2011. And as one of iShares’ core funds, expenses for HDV run a dirt cheap at 0.08% or $8 per $10,000 invested.
Another top draw for retirement investors has been real estate investment trusts (REITs). Thanks to their tax-structures, REITs kick out most of their cash flows as dividends. But rather than own a REIT ETF or mutual fund, Realty Income Corp. (O) could be the only REIT you need.
O owns an extensive portfolio of the free-standing real estate — more than 4,900 properties across the entire U.S. — and it houses commercial tenants with real staying power, such as CVS Health Corp (CVS), Dollar General Corp. (DG) and 7-Eleven. Those properties are triple-net leased as well, meaning the responsibility of paying taxes, maintenance and other fees associated with renting the property is on the tenants. O just sits back a collects a check.
And so do investors. Realty Income is dubbed the “Monthly Dividend Company” and it recently paid its 566th consecutive dividend check to its shareholders. Perhaps even better is that O has raised its dividend for 80 consecutive quarters.
With that strong history of dividend increases, massive portfolio of buildings and continued growth, Realty Income is a retirement investor essential.
Expense ratio: 0.71%
Inflation really is a silent killer for retirement investors. You need to make sure that inflation doesn’t eat your savings for potentially up to thirty years.
Treasury Inflation-Protected Securities — or bonds that provide investors a fixed yield plus an “extra boost” of adjustments designed to offset inflation — have been a great way to ward off the so-called silent killer since their inception.
The problem is that TIPS are great in a rising rate environment. As a long bond, they’ll get crushed.
The iShares 0-5 Year TIPS Bond ETF (STIP) is a great way to fight inflation and protect against the Federal Reserve’s recent rate hikes.
STIP holds inflation-protected bonds that have maturities of less than five years. That makes them less sensitive to interest rates. They won’t fall by as much when the Federal Reserve finally raises rates. This makes STIP a great place for retired investors that need inflation protection, but can’t afford the potential loss in principal.
STIP hasn’t exactly been killing it lately. But that’s the point. The fund is designed to produce an inflation-beating return, and right now inflation has been low. But for retirement investors, the idea of keeping up with the silent killer is very appealing.
Expense ratio: 0.09%
For retirement investors with money outside 401(k)s and IRAs, tax management is of critical importance. With that in mind, the Vanguard Tax-Managed Balanced Fund Admiral Shares (VTMFX) should be in every retirement investor’s taxable account.
The actively managed mutual fund holds both stocks and municipal bonds — set at roughly 50/50 for each asset class. The idea is to seek a tax-efficient total return made up of tax-free income from the munis and capital growth, along with modest taxable current income from the stocks.
VTMFX will only include stocks that pay qualified dividends and it rarely trades them, holding them for extended periods of time to reduce taxes. And muni bond’s interest is free from Federal and some state taxes. What investors get is a high return without having too large of a tax burden. Exactly what you want and need in your taxable account.
As for its return, VTMFX has been pretty great over the years. Since its inception in 1994, the fund has averaged around 7.57% in total returns annually. That’s not too shabby considering its mandate and that it holds half its assets in boring muni bonds.
The only downside is VTMFX’s high initial investment of $10,000. However, expenses are dirt cheap at 0.09%.
Expense ratio: 0.50%
For retirement investors, it’s a constant battle between safety and finding yield — especially now, considering where interest rates are. To find that balance, investors may want to look at preferred stock.
These hybrids feature high yields — often in the 4% to 7% range — like bonds. They also feature a par value that after a certain maturity date, they can be called by the issuing company. The real benefit of preferred stock is that it is senior to common stock in that dividends must be paid to preferred holders before common stock.
The PowerShares Preferred Portfolio ETF (PGX) tracks a basket of these securities — currently more than 260 different preferreds. The bulk of those are issued by financial firms, which may spook some investors; however, that isn’t so much a problem given preferreds’ status in the food chain.
There’s less risk here.
And that shows up in PGX’s volatility or lack thereof. The beauty is that PGX generally does not need to move around as much as regular stock ETFs. Much of the return comes from the high yield. But for those in retirement, PGX’s 30-day SEC yield of 5.61% is a great return.
Expense ratio: 0.40%
There are plenty of reasons why investors should have some gold exposure in their portfolios. In small doses, the precious metal can act as a great diversifier, hedging against inflation and catastrophe. But you don’t need to go through the hassle of owning coins and bullion to get those benefits. Retirement investors are better suited through one of the ETFs tracking the metal.
And when it comes to that, the SPDR Gold Trust (ETF) (GLD) is really the only game in town.
Clever ticker aside, GLD is the largest physically backed gold ETF with more than $35.5 billion in assets. As a physically backed ETF, each share of GLD represents a portion of real gold locked away in a vault. In this case, each share is worth one-tenth of an ounce of gold. The real beauty for investors is that this ETF makes owning the precious metal beyond simple.
Buy ten shares, of GLD, and you have one ounce of the precious metal in your portfolio. It’s as easy as that. Add in the ETF’s low expense ratio of 0.40% and high liquidity, and you have a recipe for success.
Expense ratio: 0.08%
When it comes to retirement, large-cap stocks are often the top draw. The problem is that most modern retirements can last 30 years or more.
That means there needs to be plenty of growth still left in the tank to get you through those years. And that means small- and mid-caps still need to be on the menu for retirement investors.
But rather than bet on some individual stocks and the risk they come with, choosing a broad choice like the Vanguard Extended Market Index Fund Admiral Shares (VEXAX) makes a ton of sense.
VEXAX tracks the S&P Completion Index and it provides exposure to more than 3,200 different small- and mid-cap U.S. stocks. Really all of them. The volatility and single-company risk is minimized to almost zero with the fund. That makes it great for retirement investors looking to add a bit of growth to their portfolios. And when you combine the fund with large-cap holdings, you basically have the U.S. stock market covered.
The fund is available as an ETF as well — the Vanguard Extended Market ETF (VXF). Either way, the fund makes an ideal selection for investors looking to beef up their growth exposure.
This article is from Aaron Levitt of InvestorPlace. As of this writing, he was long MKC.
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