The highest the yield has been was 2%, currently 0.77%, so not for an de-accumulation portfolio. U could of course now take out all the profit an invest in a higher yielder and hope history repeats. Stick to your plan until it sticks to u.

Strategy

A really great stockmarket, the best, some tell me the best they’ve ever seen

US equities should be the bedrock of any diversified portfolio…

Alan Ray

Updated 03 Jul 2024

Kepler

Disclaimer

This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.

We’ll let you into a secret. It’s a pretty safe bet, even without the advantage of privileged information, that by the fall, we will all have read, or at least will have been invited to read, some comments about what the US election means for markets. It’s a rather enjoyable internet rabbit hole, if one has a few minutes to spare, to search for something like ‘how does the S&P 500 Index perform under different presidents’ and we expect there will be at least one cut-and-paste of this topic sent to our inboxes before November. On the Thursday before the first presidential debate, we drafted something to the effect that we are in the relatively unusual position of both the main candidates having already served a term and both having seen the S&P 500 Index rise under their tenure, although obviously we accept that the incumbent has a few months to go. By the Friday after the debate, it seems possible that a third scenario, or candidate, could emerge, and all we can say to anyone thinking of writing the abovementioned article then is ‘good luck with all that’.

We Brits probably need a break from politics right now, so let’s park that thought and just for fun make some polarising statements about investment instead. The trouble with US equities, for a UK investor, is that there is a very limited ‘equity income’ opportunity, and as we know equity income is a big priority for many investors. Dividend yields are much lower in the US, and companies prefer to either invest excess cash, or return it via share buy-backs. Thus, while UK investors are probably well aware that the US equity market generally provides a better engine for capital growth, they favour the home team, as it pays a regular dividend.

On the other hand, the trouble with UK equities is that by far the largest group of funds that invest in it are equity income funds, that keep a tight leash on the companies they own, rewarding them for paying out profits as dividends and punishing them if they dare to drop the dividend, even if it’s for good long-term investment reasons.

In writing these two paragraphs, the writer is deliberately setting out two opposing views in simple terms, because the longer, more nuanced version might take a while, and in this era of instant reactions, no one has time for that, right? Suffice to say that a) there are plenty of exceptions to both sides of this argument and b) no one should feel any guilt about investing in companies that pay dividends. Some businesses really are better as dividend machines and investors should be very happy to own them. That said, readers of the financial press will have found it virtually impossible to avoid the existential angst playing out in the press around the London Stock Exchange’s inability to attract or retain high growth companies. It would be wrong to say that ‘equity income culture’ has not been discussed as one factor, but it seems to be playing a much smaller role in the discussion than various other ‘solutions’ such as incentivising or compelling investors to invest in the UK. If the answer is ‘let’s force institutions to own UK equities, and that extra capital is bound to attract companies they actually want to own’ then we think the wrong question is being asked.

Stick with us, this is a piece about US, or North American, equities we promise. The reason for this preamble is that it is possible that investment trust investors, many of whom are underweight US equities, are in that position not because they don’t follow the above argument, and they have seen versions of the chart below before, but because they want and need dividends. The evidence of this has played out across the investment trust sector over many years, with huge amounts of money raised for income strategies, and many investment trusts with little or no underlying income opting to pay dividends from capital profits. In recent days we have seen two further trusts, Schroder Japan Growth Trust (SJG) and Invesco Global Equity Income (IGET), both announce they will be making a contribution or a larger contribution to their dividends from capital. There is though, another pretty simple way an investor can derive an income from owning an investment trust. One can just sell a few shares at the appropriate interval. We of course know that’s a massive behavioural shift for many investors, but is it so different from accepting dividends from capital profits, which is the path that so many investment trusts have gone down over the last decade? It would allow investors to draw their income while enjoying the return potential which has seen the US soar away from the UK indices in recent decades.

US AND UK EQUITIES OVER TWENTY YEARS

Source: Morningstar
Past performance is not a reliable indicator of future results

In fact, there are some subtle differences between selling shares and receiving a capital dividend. One of the less-well discussed features of paying dividends from capital is that, should an investment trust trade at or above asset value, then the case for paying those dividends begins to weaken, as shareholders are better off if they sell their shares in the market for a higher price than if they receive capital at NAV through a dividend. On the other hand, when an investment trust is trading at a discount, paying a capital dividend is, from a mathematical point of view, the equivalent of the investor being able to sell some shares at net asset value rather than at the share price, which is a very good thing. Thinking of it like that can quickly help the reader see that when shares are at a premium, a capital dividend may not be the best way to receive a distribution. Of course, generally speaking the percentage differences are tiny and may not matter compared to the convenience, but still, geeks like us feel compelled to point it out. But investors thinking about selling shares versus a capital dividend shouldn’t really get too hung up on the differences if considering investment trusts on relatively small discounts or premiums.

For geeks like us though, it’s good to know that the investment trust we consider to be the essential ‘core’ active holding for US equities, JPMorgan American (JAM), doesn’t pay dividends from capital as it invariably trades close to, or above asset value, being on a c. 2% discount at time of writing after a period earlier in 2024 of trading at a premium. JAM also provides the case study that seems to contradict our statement that investment trust investors are underweight the US, since it is a FTSE 250 Index investment trust with total assets of c. £1.9bn, with little or no discount. Then again, the UK equity income sector has total assets of over £12bn, which doesn’t really square with the US’s 70% weight in the MSCI World Index compared to the UK’s c. 4%. Hence our ‘underweight’ contention.

JAM has built an excellent track record of outperformance balanced with that ‘core’ holding status. It has achieved this by marrying two sets of fund managers with biases to value and growth stocks respectively, meeting on the common ground of ‘quality’ to create a 40 or so large-cap portfolio that tends to grow a little faster and trade a little cheaper than the market. What we like about this is that it gives the trust the flexibility to adapt to different phases of the market but emphasising one or the other style, without ever straying too far into deep value or blue-sky growth. The results have been excellent and the fact that JAM has recently returned to a premium rating, during a period when the investment trust sector is experiencing persistent discounts across many areas, says that we aren’t the only ones to have noticed this. A very good track record of buying shares in when JAM strays to even a small discount should give investors confidence that this trust’s board understands that to maintain its reputation as an essential holding in any portfolio requires that the share price reliably tracks the net asset value. Finally, to provide the full ‘core’ equity experience, JAM allocates a small portion of the portfolio, less than 10% and currently c. 7%, to small caps, which is managed in a similar way with a growth and a value manager working together to build a blended portfolio. Thus in the scenario outlined below, JAM still has the potential to outperform.

While large-cap US equities, notably technology and the ‘Mag 7s’, have put US equities firmly in the spotlight over the last year or two, smaller-cap equities have lagged and the managers of both investment trust specialists in this area, Brown Advisory US Smaller Companies (BASC) and JPMorgan US Smaller Companies (JUSC) continue to highlight the valuation disparity between small- and large-cap equities. We’ve seen the same phenomenon in the UK and the rest of Europe, and the disparity is partly explained by higher rates, which can be more challenging for smaller companies themselves but also tend to make equity investors more risk averse, but there’s also the reality that with passive investing playing such an important role in the US in particular, money flowing into equities will tend to hit the large well-known ETFs first. But let’s not forget that a domestic-facing smaller company in the US is addressing a continental-sized market, slightly bigger in GDP terms than Europe, including the UK, and so very often these are large well-established businesses able to survive a downturn.

Neither of these trusts pays the kind of dividend that an income investor would be attracted to, but again, there is more than one way to take an income. While every small-cap recovery in history is a bit different, falling interest rates and inflation are linking themes. We would though say that interest rate cuts are sometimes driven by the need to stimulate an economy, which means rate cuts aren’t always immediately ‘good news’ and so the path to a small-cap recovery may be more complex than ‘rates go down, small caps go up’. But with the valuation gaps both managers identify being so large, we might expect to see a confirmatory wave of M&A in the US small-cap world presaging an improvement in valuation.

As ever, it’s important not to forget the US’s neighbour Canada, which provides a very different set of opportunities to the US equity market, and for investors unconvinced by our ‘just sell some shares regularly’ argument, has an equity income culture more akin to the UK than the US. Middlefield Canadian Income (MCT) yields c. 5% through a traditional income-based dividend policy and gives investors exposure to Canada’s REIT sector, the trust’s biggest position, alongside the country’s important energy and pipeline infrastructure sectors and Canada’s conservatively managed banking sector. Canada was the first G7 country to cut interest rates earlier this year, and with a c. 25% exposure to interest-rate sensitive REITs, MCT could benefit from a strong recovery in this sector, which like the UK equivalents trades at a very wide discount currently.

Finally, BlackRock Sustainable American Income (BRSA) does pay a yield that is at a level an equity income investor would be interested in. It does this using a mix of current revenue and capital reserves, and over recent years has held the dividend at a constant level, which at time of writing equates to a yield of 4%. BRSA has a long-standing value investment style which has been a performance headwind, but investors who worry about the high valuations that more growth-orientated stocks in the US market trade at might find this value style appealing.

There are, of course, many other ways to invest into the US through investment trusts, and so again we can chip away a little at our own claim that investors are ‘underweight’. The widely owned group of Global trusts will be familiar to all readers, and often the US is the largest single country exposure. We would highlight a couple of other specialist trusts that, notwithstanding global mandates, derive most of their returns from companies listed in the US. Allianz Technology Trust (ATT) provides specialist exposure to the technology sector, and generally has about 90% of the portfolio invested in the US, which is a measure of where much of the technology growth stocks in the world are listed rather than a comment on the manager’s particular preferences. Clearly a sector specialist such as this comes with potentially higher volatility and cyclicality risks than a generalist core trust such as JAM, highlighted above, but there is of course also the potential for higher returns given the nature of the sector ATT specialises in. In a similar vein, International Biotechnology (IBT) provides exposure to the adjacent healthcare and biotechnology space and again the c. 85% exposure to the US is an expression of the US’s importance in this area rather than a management bias. Highlighting these two specialists also helps to highlight that to be diversified across all the important sectors, is not so easy to do without placing the US at the centre of a portfolio. IBT also, income investors will be pleased to know, does pay dividends using capital profits, paying 4% of NAV in four quarterly instalments, which means at its current 11% discount the yield is c. 4.4%. We could obviously reel off a long list of other trusts that also predominantly invest in the US, but these two serve to highlight two of the largest sectors that help set the US apart from other markets.

Conclusion

Eagle-eyed readers may have spotted our choice of ‘fall’ rather than ‘autumn’ in the opening paragraph, and apart from the fact that we just quite like the sound of it, its origins, in old English, are a reminder of the ties that still bind us to the US, however shaky they might appear sometimes. ‘Invest in what you know and understand’ is very good advice and investors shouldn’t feel worried if their comfort zone is UK equity income; it’s a fine way to invest for the long term, and as we’ve discussed before, certainly beats inflation. There’s also no particular reason why an investor needs to care at all what the MSCI World Index, or any other index says about the relative importance of different markets. But given the extraordinary potential of the US’s continental economy to generate equity returns over the long term, discussed a little while ago here, we think it would be a shame if all that was holding investors back was a little thing like dividends.

No savings? I’d put £100 a month into this sleepy giant to generate passive income of £7,772 a year.

Story by James Beard

by The Motley Fool

I recently read that “passive income is the fuel that powers your dreams, giving you the freedom to pursue your passions and live your life on your own terms”. I have no idea who came up with this quote, but I hope they dream well and are in a position to spend their time doing something fulfilling.

Another investing concept that gets a good press is compounding. In the case of income stocks, this is the act of reinvesting dividends to buy more shares, generating an ever increasing level of return. This has been described as the eighth wonder of the world.

Just imagine how happy we could be by combining the two! Well, that’s what I try and do.

Now, I must be honest. I still have to work for a living and I’d love to have more freedom to do what I want. But I do have a steady stream of passive income that I’m reinvesting with a view to having a more comfortable retirement.
Take two
If I were to start my investing journey all over again, I’d put a relatively modest amount (say £100) into UK income stocks. If I then received dividend payouts of 5.9% a year — payable two-thirds/one-third in January and July, respectively — my hypothetical sum would grow to £67,248 after 25 years.

At this point, my shareholding would be generating income of £3,967 a year.

Readers may be wondering why I’ve chosen such specific numbers. Well, that’s because National Grid (LSE:NG.) presently offers a 5.9% yield and pays a dividend twice a year.

And it’s a share that has a long track record of increasing its payout.

My example assumes zero growth in its dividend. However, factoring in an increase of 3.6% a year — the company’s average annual increase over the past five years — would increase my investment pot to £131,731. This could give me an annual passive income of £7,772.

Remember, there could be some capital growth too.

Caution
Of course, the stock price could fall. And dividends are never guaranteed. But this example highlights the potential long-term gains achievable from picking a steady and reliable income stock.

National Grid is able to pay a generous dividend because its earnings are reasonably secure. It operates in a regulated industry, which means as long as it keeps the lights on (literally), it will be able to achieve a pre-agreed level of return.

Because of this its share price performance tends to be unspectacular. This — along with the fact that it’s the UK’s 13th-largest listed company — is why I describe it as a sleepy giant. I think there’s always room for this type of stock in a well-balanced portfolio.

But there are a couple of things that could threaten its ability to maintain its healthy dividend.

Although it doesn’t face any competition it must meet its regulatory obligations. This requires huge capital expenditure.

It surprised shareholders in May by asking them for more money. Due to the company’s large borrowings, perhaps its directors felt they had no alternative other than to approach its owners for additional cash. I wonder if the terms offered by lenders were unfavourable.

However, despite these challenges, the next time I’m in a position to invest I’m going to seriously consider taking a stake.

The post No savings? I’d put £100 a month into this sleepy giant to generate passive income of £7,772 a year! appeared first on The Motley Fool UK.

£££££££££££££££

Take two
If I were to start my investing journey all over again, I’d put a relatively modest amount (say £100) into UK income stocks. If I then received dividend payouts of 5.9% a year — payable two-thirds/one-third in January and July, respectively — my hypothetical sum would grow to £67,248 after 25 years.

Whilst u should receive a 5.9% buying yield, the running yield would fall if the price rose and any dividend growth never equalled the yield/price fall.

Thursday 11 July

Amedeo Air Four Plus Ltd ex-dividend payment date
Balanced Commercial Property Trust Ltd ex-dividend payment date
BlackRock Latin American Investment Trust PLC ex-dividend payment date
Custodian Property Income REIT PLC ex-dividend payment date
Global Smaller Cos Trust PLC ex-dividend payment date
Invesco Bond Income Plus Ltd ex-dividend payment date
JPMorgan Asia Growth & Income PLC ex-dividend payment date
JPMorgan Japan Small Cap Growth & Income PLC ex-dividend payment date
Merchants Trust PLC ex-dividend payment date
Real Estate Investors PLC ex-dividend payment date
Schroder European Real Estate Invest Trust PLC ex-dividend payment date
Schroder UK Mid Cap Fund PLC ex-dividend payment date
Supermarket Income REIT PLC ex-dividend payment date

For the third week in a row, the number of investment trusts trading at 52-week high discounts stands at six, but there are a couple of new names that make it onto the list.

By
Frank Buhagiar
08 Jul, 2024

Doceo

We estimate there to be six investment companies trading at 12-month high discounts over the course of the week ended Friday 05 July 2024 – no change from the previous week.

For the third week in a row the number of investment companies trading at 52-week high discounts to net assets stands at six. Still, that’s very much at the lower end of what’s been seen year to date.

Among the new names on the Discount Watch – Regional REIT (RGL), the shares of which hit a year-high discount of -80% to net assets. That’s pretty much in line with the -82% discount at which the 10p price set for the fully underwritten £110.5 million fund raise stands at compared to net assets. A case of the market getting into line with the fund raise.

abrdn Diversified Income and Growth (ADIG), another new entrant to the list. The fund is in the process of winding itself up and is due to return £115 million or 38p per share to shareholders via the issue of B shares. The shares went ex on 3 July, meaning those who bought the shares after then would not be eligible to receive the B shares. Share price subsequently shed 38p to 44p. The company also announced that its latest net asset value stood at 69p a share as at Friday 5 July. Once again, that’s 38p lower than the 107p NAV announced on 3 July. All eyes now turn to future returns of capital.

Quick word on Downing Strategic Micro-cap (DSM), which appears on the list for a second week in a row. Last time round, DSM’s year-high discount was reported as -69.40%. This was put down to the shares going ex a 17.5p special dividend on 27 June. Shares subsequently dropped to 8.5p. However, the net asset value of 27.78p that was reported on 27 June did not take into account the special dividend. Hence the -69.40% discount. Net asset value was adjusted the next day to 10.28p leaving the shares trading at a -17.5% discount. 2 July NAV however was reported at 11.65p and with the share price at 8p this equates to the -31.3% discount reported here. Last week’s -69.4% discount, an anomaly, one that was down to timing it seems.

The top-five discounters

Fund Discount Sector

Regional REIT RGL -80.03% Property

Ground Rents Income GRIO -70.60% Property

Ceiba Investments CBA -69.64% Property

abrdn Diversified Income & Growth ADIG -35.01% Flexible

Downing Strategic Microcap DSM -31.31% UK Smaller Companies

The full list

abrdn Diversified Income & Growth ADIG

Regional REIT RGL

Ceiba Investments CBA

Ground Rents Income GRIO

Aquila European Renewables AERI

Downing Strategic Micro-cap DSM

James Yardley, senior research analyst at the VT Chelsea Managed Monthly Income fund Provided by City AM

In this weekly series, investment reporter Elliot Gulliver-Needham sits down with a fund manager for a Q&A. This week, we’re hearing from James Yardley, senior research analyst at the VT Chelsea Managed Monthly Income fund.

Top holdings

How does your fund stand out from others in the same market?

Our investors love the fund’s consistent monthly income. The fund pays out exactly the same amount for 11 months of the year with a final remainder payout with any income left over. It’s a fund of funds which combines open-ended Funds, ETFs and investment trusts.

This allows us to get income from a very wide range of sources. Alongside traditional stocks and bonds, the fund also has exposure to infrastructure, renewable energy, supermarkets, GP surgeries and care homes to name a few.

Whilst peers were forced to cut their dividends during Covid, this fund did not. The monthly dividend payout has only ever increased since our launch seven years ago and we model our dividends years ahead.

We have added a huge amount of value from our investment trusts over the past seven years even as much of the sector has struggled. We are able to vary our weights between open-ended funds, ETFs and investment trusts depending on discounts, dividend yields and market sentiment.

Another big differentiator is the fund’s costs. A traditional criticism of fund of funds is they are prohibitively expensive. With this fund’s launch, we were determined to change this – it has a very low AMC, and any discounts or special share classes it obtains all go back into the fund. Its OCF is just 0.71 per cent.

Which of your holdings are you most excited about

We’re really excited about investment trusts.

A combination of technical reasons, higher interest rates, regulations and some individual stock blow-ups has meant the sector is very out of favour. This is providing some amazing opportunities.

Our favourite holding is currently Assura. This REIT, specialising in GP surgeries, gets almost all its rent from the NHS. This is a very boring but reliable strategy. Exactly what we like.

The fund’s earnings and dividends have increased year on year over the past decade. Despite this, the share price has been incredibly volatile, having declined by over 50 per cent while the yield has simultaneously risen to almost 8.5 per cent.

The trust has also locked in the majority of its debt at very low rates for the long term. We think this trust will do very well if rates ever start to come down and, in the meantime, we are happy to be patient and collect the dividends.

££££££££££££

Yields just over 5% so not suitable for the blog, maybe one to consider if u are in a de-accumulation stage along with SMIF yielding 8% for a monthly income stream at the safer end of the market.

How I’d aim to build a £48,000 income from FTSE shares and never work again
The Motley Fool

by Zaven Boyrazian, MSc

FTSE shares can be a powerful passive income-generating tool for prudent investors. The UK’s home to some of the most generous dividend-paying enterprises on the planet. And while not all of them are sound investments, the vast pool of opportunities provides investors with ample choice.

In fact, given sufficient time, putting aside £500 each month for top-notch FTSE stocks could be the key to unlocking a £48k income stream in the long run. And those who start early may even get to enjoy an earlier retirement.

Earning income from a portfolio
Having cash appear in a bank account from an investment portfolio is relatively straightforward. Investors just need to buy and hold dividend stocks and, usually every quarter, money will magically materialise. However, for those seeking to earn the equivalent of a five-figure salary, taking dividends may not be the smart move.
Instead, these payments should be automatically reinvested. This results in owning more shares in each business so that the next time dividends are paid out, investors end up receiving more, even if dividends don’t get hiked, in a snowballing compounding process.

If we use the FTSE 100 as a benchmark, investors who historically reinvested their dividends have earned close to 8% a year instead of just 4% on average. By investing £500 a month at these rates for 35 years, that’s the equivalent of having a portfolio worth £457k at 4%, or £1.2m at 8%!

In terms of income, that’s the equivalent of having either £18,280 without reinvesting during the first 35 years or £48,000 with reinvestments each year. Of course, this is assuming that another market crash or correction doesn’t come along to throw a spanner into the works.

Finding suitable stocks
Clearly, dividend reinvestment delivers the best results, providing investors are able to wait before taking their dividend profits. However, it’s important to remember that not all dividends are worth the same. Reinvesting capital into a struggling business that’s likely to cut shareholder payouts isn’t prudent capital allocation.

Instead, investors must pay close attention to the opportunities they’re presented with. As I previously mentioned, not all FTSE shares are good investments. Therefore, even if a high yield is being offered, discipline’s required to avoid falling into traps.

That’s why a company like Admiral (LSE:ADM) looks potentially interesting. The insurance business continues to be a dominant force in its industry. And based on its latest results, it’s easy to see why.

Despite the adverse market conditions, Admiral managed to get more customers through its doors despite higher insurance premiums. As such, total turnover in 2023 increased by 31%, with pre-tax profits up 23%. Subsequently, the return on equity reached 36% compared to 29% the year prior, with solvency ratios improving across the board.

Needless to say, those are some desirable traits for a source of dividends. But obviously, they come with some risk factors. With around half of its customer base concentrated in motor insurance, the impact of inflation is significant. Don’t forget motor insurance policies have a high chance of receiving claims compared to other insurance products. And they’re notoriously expensive, especially now that car parts have risen drastically in cost.

Nevertheless, Admiral’s management has demonstrated the prudence of its strategy, making this a risk potentially worth taking.

The post How I’d aim to build a £48,000 income from FTSE shares and never work again ! appeared first on The Motley Fool UK.

Do you like the idea of dividend income ?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over ?

Retirement Income Funds to Keep Cash Flowing In Your Golden Years© Getty Images

Ah, retirement. No more snarled commutes, demanding bosses or tight deadlines. But after saving for decades, you now have to figure out how to turn your nest egg into a cash spigot. “It’s a big moment going from earning an income to not earning an income. There’s a lot of emotion and change,” says Jeffrey DeMaso, editor of The Independent Vanguard Adviser, a newsletter for Vanguard fund investors. 

Re-engineering your portfolio from accumulation mode to decumulation mode can be daunting. You’ll have to get a handle on how much you need for essential expenses, and you’ll need a strategy to cover them for the rest of your life. “The biggest fear people have about retirement is running out of money,” says Anne Ackerley, head of retirement business at BlackRock.

Fortunately, a variety of products and services – some new, others new-ish – are designed to help people spend and invest their savings wisely in retirement. Some are available only in certain workplace retirement savings plans, so access depends on whether it’s offered in your plan. Other funds or services are available to all individual investors. We’ll walk you through some of the options. All data and returns are through November 30, unless otherwise noted. 

Like their conventional target-date-fund predecessors, target-date-plus-annuity strategies invest in multiple asset classes that shift over time to a more conservative mix as you age. The twist is, at a certain point along that glidepath some of your contributions are directed to an annuity. BlackRock’s LifePath Paycheck and Nuveen’s Lifecycle Income series are two examples. Both will be available in some retirement plans this year. 

The way the annuity portion works varies. Nuveen’s funds invest a portion of the bond portfolio in an annuity at the start of the series’ glidepath, 45 years before retirement. The annuity allocation starts at 2.5% of the portfolio and increases to 40% at the end of the glidepath. Allocations to the annuity contract included in BlackRock’s LifePath Paycheck series, by contrast, start when investors hit age 55. The annuity makes up 8% of the overall portfolio to start and climbs to 30% over the next 10 years. In both series, the annuities have the risk-and-return profile of a broad-market bond fund. 

Both the BlackRock LifePath Paycheck and the Nuveen Lifecycle Income series allow investors to choose when to turn on the income. At what age those payments can begin, however, depends on the strategy. Investors can also choose never to turn on the income feature if they don’t want or need it. Plus, the annuities are institutionally priced (read: less expensive). There’s no transaction fee or sales charge related to the annuity part of the target-date strategies, though there is a fee that the insurance company pockets. According to Nuveen, it is reflected in the annuity payout. 

Expect more retirement funds with annuities to appear in workplace retirement plans. “Within 10 years, target-date funds with income are going to be the main thing in retirement plans,” says BlackRock’s Ackerley. 

Not all retirement income strategies in 401(k) plans are tied to annuities. The Fidelity Managed Retirement target-date funds employ a cash-withdrawal strategy that starts at 4% of assets and gradually increases over time as you age. Choose the fund that aligns closest to the year you turn 70. Experts set the glidepath and do the ongoing asset allocation for these 401(k) offerings, as well as create a payout schedule for you. “The idea is to provide stable payments and still have a remaining balance,” says Sarah O’Toole, a Fidelity institutional portfolio manager. 

T. Rowe Price has a 401(k) plan offering called Retirement Income 2020 that aims to deliver a 4%-to-5% payout a year in monthly distributions, but it depends on the fund’s return. There are only two vintages so far: 2020 and the soon-to-launch 2025. “When the portfolio does well, the payout goes up. When it doesn’t, the payout goes down a bit,” says fund comanager Andrew Jacobs van Merlen. These strategies are also available to retail investors as mutual funds (more on them later).

Retirement income funds for everyone 

If your 401(k) plan doesn’t offer retirement income funds like the ones we just mentioned, or a defined-contribution plan isn’t available to you, you have a handful of mutual funds and financial services to consider. Unfortunately, none feature the guaranteed income of an annuity. 

We should note that retirement income funds aren’t a new idea. Several firms, including Fidelity and Vanguard, launched managed-payout funds in 2007 and 2008 that promised to provide a steady income stream. The timing was terrible (around the arrival of the Global Financial Crisis). The funds didn’t catch on. 

That said, the stars are aligning for retirement income funds today: More retirees are looking for help managing income, interest rates are higher, and the stock market is recovering. 

We don’t expect you to put all your eggs in one basket – or one fund – to create a workable retirement income strategy. In most cases, retirees should consider generating cash flow from multiple strategies and sources. “You’ll need an array of tools and products,” says T. Rowe Price’s Jacobs van Merlen, taking into consideration the risks you’re willing to take, how long you’ll live, and how much you’ve already saved, among other things. Bear that in mind as you peruse the following options.

The aforementioned T. Rowe Price Retirement Income 2020 (symbol TRLAX, expense ratio 0.53%) is available as a mutual fund to individual investors. A 2025 version will launch this year. The minimum investment for either fund is $25,000. 

The managers aim to generate a 4%-to-5% payout of the fund’s average net asset value over the past five years, but the monthly distribution will vary from year to year depending on the fund’s performance. (For its first five years, the Income 2025 fund will use the average net asset value of T. Rowe Price’s standard Retirement 2025 target-date fund to calculate the payout rate.) The goal is to “live off the income of the portfolio without dipping into the principal,” says Jacobs van Merlen, though there’s no guarantee on that front. So far, the 2020 fund’s annualized return since inception in mid 2017 is 5.9%, which falls in line with the fund’s annual target payout. 

At last report, Retirement Income 2020 held roughly 50% in stocks and 50% in bonds, cash and other assets. The underlying funds include some of the firm’s longtime winners, such as T. Rowe Price Growth Stock, Value and Mid-Cap Growth. 

Schwab Monthly Income funds – there are three – launched in March 2008 and have been tweaked over time. Their main objective is to provide a monthly income stream, although payouts can vary from year to year, and even from month to month. 

Conservative investors who want to preserve principal should opt for the repetitively named Schwab Monthly Income Income Payout (SWLRX, 0.21%), which holds 30% in stocks and 70% in bonds. Monthly payouts are limited to interest and dividend payments from the portfolio’s underlying funds. In a normal interest rate environment, investors might get an annual payout rate of 3% to 5%; they’d get less in low-rate environments. Over the 12-month period ending in October, the fund’s payout rate was 4.15%. But in low-rate environments, the payout rate was lower (for the calendar year 2022, it was 2.42%). 

Moderate-risk investors can choose between the Schwab Monthly Income Target Payout (SWJRX, 0.25%) and the Schwab Monthly Income Flexible Payout (SWKRX, 0.25%). Both hold exchange-traded funds, with 50% of assets in stock funds and 50% in bond funds. 

Target Payout aims for a steady annual payout of roughly 5%, though it could be higher or lower. The fund’s payout rate was 3.08% in 2022, and for the 12-month period through October it was 5.39%. 

Flexible Payout is designed for investors who can deal with more flexibility in their income stream. The fund aims for an annual payout between 4% and 6%, depending on fund performance and the market environment. In the tough stock and bond market of 2022, the fund paid out 2.96%. But for the year ending in October, the fund’s payout rate was 5.19%. Payments from both funds may include some return of capital. 

The catch with these funds is that overall returns have been ho-hum. That may be an acceptable trade-off for investors who want a monthly income stream, but in lean years, you will probably get more capital returned to make that happen. Over the past five years, Flexible Payout’s annualized 2.6% return lags 91% of its peers (moderately conservative allocation funds). Income Payout’s five-year return, 1.9%, lags 78% of its peers (conservative allocation funds). 

A trio of American Funds Retirement Income Portfolios are worth a look for investors who are less dependent on a regular check and seek a little more capital appreciation. These funds make quarterly distributions and have no payout target because they’re designed to be a resource for discretionary spending, not necessary expenses. But the experts behind the funds suggest ranges for annual withdrawal rates for each portfolio. In rough markets, for instance, investors should consider lowering their withdrawal rates.

Investors in the series’ most conservative portfolio, American Funds Retirement Income Portfolio – Conservative (FAFWX, 0.64%, yield 3.28%), might consider a suggested annual withdrawal rate of 2.75% to 3.50% of their assets in the fund. The portfolio holds almost 40% in stocks and 60% in bonds and cash. The ideal withdrawal rate for the moderate fund, American Funds Retirement Income Portfolio – Moderate (FBFWX, 0.68%, 3.02%), which holds roughly 50% in stocks and 50% in bonds, ranges between 3.00% and 3.75%. And the most aggressive strategy, the American Funds Retirement Income Portfolio – Enhanced (FCFWX, 0.69%, 2.79%), which holds 60% in stocks, has a suggested withdrawal range of 3.25% to 4.00%. 

These portfolios, which hold some of American’s best mutual funds, including American Balanced, have annualized returns over the past five years that are middling at best. But they have experienced below-average risk relative to peer funds. In 2022, when stocks fell 18% and bonds declined 13%, the Conservative and Moderate funds both lost 10.1%; Enhanced lost 11.1%. Those returns ranked among the top 20% of their peers or better. 

Finally, investors interested in a digital advisory service might consider Schwab Intelligent Portfolios. The service helps retirees generate a check from their investment portfolio through a feature called Intelligent Income. Based on the sum of money you invest with the robo service, Intelligent Income helps you figure out how much you need to withdraw and how to invest to stay on track, and it lets you set up automatic checks from your account, paid monthly, quarterly or once a year. 

You can stop, start or adjust the payout at any time, says Kristina Turczyn, head of digital advice and wealth solutions at Charles Schwab. “We wanted to offer an easy way to automate the process and generate a paycheck from your own investment portfolio.” There’s no advisory fee for Intelligent Portfolios and no additional fee for Intelligent Income.

Note: This item first appeared in Kiplinger’s Personal Finance Magazine

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