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Living off passive income from dividends can be truly life-changing as once your passive income surpasses living expenses, you are liberated from the necessity of working to support yourself. ETFs can be particularly powerful instruments towards achieving this end given that they give investors immediate access to diversified portfolios that are managed by professional managers and/or passive algorithms, making them hands-off investments.
Moreover, if you invest in high-yield funds that pay out monthly dividends, the regular passive income checks can help you easily budget your living expenses to be in line with your income and thereby maintain your long-term perspective and stick with your strategy during periods of high market volatility. On top of that, high-yield monthly dividend ETFs can potentially enable you to retire earlier since they generate significantly more passive income compared to lower-yielding stocks and even some bonds.
In this article, we will look at five well-diversified funds that pay out monthly dividends with annualized yields ranging from 7-12% and may fit in with your retirement income portfolio needs.
#1. The Virtus InfraCap U.S. Preferred Stock ETF (PFFA)
PFFA is a broadly diversified ETF that combines an actively-managed portfolio of 188 preferreds with a reasonable amount of leverage (typically in the 20-30% range) to target very attractive current income along with outsized long-term total returns relative to the broader preferred equity sector. The management team has successfully accomplished this as the fund currently offers a fully-covered 9.6% dividend yield that is paid out monthly (and was actually raised this year by 1.5%) and has more than doubled the total return performance of iShares Preferred and Income Securities ETF (PFF) since its inception:
As a result, investors who are looking for a relatively defensive and lucrative yield without giving up too much in the way of total returns may find PFFA quite attractive. This could prove particularly true given that interest rates appear set to fall in the coming years, which should cause preferred equities to move higher. For more on this fund, you can read our recent in-depth analysis here.
#2. The Cohen & Steers Quality Income Realty Fund (RQI)
RQI is a broadly diversified REIT CEF that owns a well-diversified portfolio of 203 holdings. It mostly holds equity REITs, but also has some fixed-income holdings as well. It also employs a reasonable amount of leverage to enhance yield and total returns without subjecting the fund to excessive risk in downturns.
Between its 8.25% current yield that is paid out monthly and was not cut during the COVID-19 lockdowns and skilled active management (which has outperformed the broader REIT sector as depicted by Vanguard Real Estate Index Fund ETF (VNQ) since its inception), RQI looks like an attractive way to play the real estate space at a time when REITs are deeply undervalued and leading institutional investors like Blackstone (BX) are buying them hand-over-fist.
For more on this fund, you can read our recent in-depth analysis here.
#3. The JPMorgan Equity Premium Income ETF (JEPI)
JEPI is a very well-diversified ETF that combines the power of leading mega-cap and large-cap companies with high monthly dividend payouts. As a result, it gives investors rare access to the likes of Microsoft (MSFT) and Amazon.com (AMZN) in conjunction with high-income yields.
With an ~8% trailing twelve-month dividend yield and fairly stable monthly payouts fueled by options premiums from its notional covered-call strategy, JEPI has given investors attractive current income while preserving shareholder capital quite well since its inception, making it a useful long-term monthly income machine.
For more on this fund, you can read our recent in-depth analysis here.
#4. The Neos S&P 500(R) High Income ETF (SPYI)
SPYI is somewhat similar to JEPI in that it pays out very attractive monthly dividends funded by an option-selling strategy while having diversified underlying exposure to mega-cap and large-cap stocks. While its expense ratio is higher than JEPI’s, it also offers a higher dividend yield of nearly 12%. It also has much greater exposure to mega-cap technology stocks, so it can be a nice balancing fund alongside JEPI for those wanting greater yield and greater exposure to mega-cap tech stocks in exchange for paying a higher fee to management. For more on this fund, you can read our recent in-depth analysis here.
#5. The Cohen & Steers Infrastructure Fund (UTF)
Last, but not least, UTF gives investors access to an 8.4%-yielding actively managed infrastructure fund that pays monthly and did not cut its dividend during the COVID-19 lockdowns. With very defensive underlying holdings and the major macro tailwinds of demographics, development, digitalization, deglobalization, and decarbonization driving tens of trillions of dollars in expected investment into the sector in the coming decades, UTF looks like a great way for income-focused investors to ride this wave. For more on these trends and how the fund is positioned to benefit from them, you can read our recent in-depth analysis here.
Investor Takeaway
For investors looking to build a portfolio of high-yielding monthly-paying dividend funds, these five can give you a great start with a well-rounded and well-diversified portfolio that can get you well on the path to financial independence.
While we prefer to pick our own stocks and manage our own portfolio actively according to value investing principles because we have been able to significantly outperform the funds discussed in this article by doing so, for investors who value passivity over maximizing total returns, these funds are not a bad alternative.