Income-producing investments play a pivotal role in a well-rounded portfolio, offering stability, cash flow and wealth preservation. For those reasons, investors should view income investments differently than growth stocks, which offer more potential for capital appreciation but have greater risk.
Income investments offer a cushion during times of market volatility, as investors saw in 2022, and during August, September and October of 2023, when equity markets declined.
Advisor’s Corner is a collection of columns written by certified financial planners, financial advisors and experts for everyday investors like you.
Regular dividends from stocks and interest payments from bonds create a steady income, reducing reliance on capital appreciation alone. That’s particularly important during broad market downturns.
By balancing growth-oriented assets with income-generating ones, investors create a resilient portfolio that can weather market fluctuations while providing a consistent source of returns.
Here’s a look at various investments that can provide income in your portfolio for 2024:
Bonds serve as a stabilizing force in portfolios, providing income, capital preservation and diversification. They also dampen the volatility of equities, which can help smooth returns.
The Vanguard Total Bond Market ETF (ticker: BND) is the largest bond exchange-traded fund, or ETF, with $105.4 billion in total assets. Its trailing 12-month yield is 3.1%, and it has a low expense ratio of 0.03%.
It tracks an index of investment-grade, taxable, fixed-income domestic securities, including government and corporate bonds. The average maturity is between five and 10 years, and the average yield to maturity is 4.5%.
Another popular bond fund is the iShares Core U.S. Aggregate Bond ETF (AGG), with a 12-month yield of 3.1%. This ETF has $101.5 billion in net assets and tracks an index composed of the total U.S. investment-grade bond market. It has an expense ratio of 0.03%.
In a Dec. 8 blog post, analysts at J.P. Morgan said they believe bonds have a greater role to play in portfolios as rates fall, while “the extent of today’s elevated yield levels may not last much longer.”
J.P. Morgan analysts added, “Rates are falling, and fast. Ten-year Treasury yields have dropped over 80 basis points since their peak in mid-October. And historically, they’ve fallen more than 200 basis points in the two years after the final Fed rate hike, which we think we saw in July.”
Similar to bonds, dividend-paying stocks offer investors a consistent income stream, providing stability in down markets.
Additionally, a dividend is frequently a signal of a company’s strength and financial health. That makes dividend stocks attractive for income-oriented investors seeking a reliable source of returns.
Some sectors are reliable dividend payers through thick and thin markets. Reliable dividend-paying sector ETFs (with their trailing 12-month yields) include:
As markets cycle through up and down years, or even months, investors can weather the storm by concentrating a portion of their portfolios on income-producing assets.
“Just think of it, the stock’s price goes up, you make money and then you get money for the dividend. If the price goes down, you still receive the quarterly dividend,” said Glenn Tompkins, senior market strategist at VectorVest, in an email.
“Oh, by the way, some companies will actually pay you dividends on a monthly basis. Now we are talking,” he says. “Dividend-paying stocks are a great way to make money while you sleep.”
A convenient way to access dividend-paying stocks is through an ETF such as the Vanguard Dividend Appreciation ETF (VIG), which tracks large-cap U.S. stocks with a record of growing their dividends year over year.
Master limited partnerships, or MLPs, are business structures common in the oil and gas industry, combining the tax benefits of a partnership with the liquidity of publicly traded stocks.
MLPs are known for high dividends, as they pass profits directly to shareholders, which in turn grants the MLP tax advantages and allows them to avoid corporate income tax.
The nature of their operations often involves energy infrastructure like pipelines, which generate stable cash flows regardless of whether oil prices are rising or falling. That’s because energy transportation companies, many of which are structured as MLPs, earn revenue through long-term service contracts.
Energy MLPs with high dividend yields include:
As an industry, oil and gas pipeline companies climbed steadily higher in 2023, and industry leaders overall have posted impressive one-year returns as of Feb. 6. However, even if MLP stocks were to decline in 2024, their dividend payouts remain reliable.
Primarily investing in income-producing real estate, such as commercial properties or residential developments, REITs specialize in generating consistent rental income.
In 2023, the S&P real estate sector was one of the laggards. However, their predictable cash flows allow them to sustain and often increase dividend payouts, making REITs a popular option for investors seeking a stable income stream. That means REITs are income investments to consider in 2024, whether the market trades higher or lower.
Top dividend-paying REITs and their yields include:
Annuities can be controversial due to fees, complexity and potential surrender charges. However, for investors seeking dependable income streams, especially in retirement, annuities can offer guaranteed dividends.
When you purchase an annuity, you make payments to an insurance company, typically through a lump sum or periodic contributions. In return, the insurer provides a guaranteed income stream, either immediately or in the future.
While many investors and financial advisors balk at using annuities, there are situations where they may make sense. Their fixed or variable payment structures provide a reliable source of income, making them suitable for risk-averse individuals.
Paul Tyler, chief marketing officer of Nassau Financial Group, says retirement savers can think of annuities as tools to reduce their future liabilities in retirement. “For example, you know you will have future health care, basic living requirements and housing expenses to cover in the future when you stop working,” he says.
“An annuity purchased today can create a predictable stream of income in the future to at least partially offset those expenses,” Tyler adds. “An annuity also allows the assets to grow for a longer period of time before being withdrawn to cover known future expenses in retirement.”
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