How To Build An Income Portfolio For Retirement

As the Baby Boomer generation plans for their retirement, it is no secret that there will be an increasing demand for income producing securities.  While I prefer individual dividend growth stocks, the ETF universe is offering some attractive alternatives that may make retirement planning a little less time-intensive.

With number of income producing investment products increasing, one should notice the growing selection of Dividend paying ETF products that sample indicies from around the globe.  With low expenses and exposure to hundreds of companies worldwide, ETF’s may become the choice investment for the future.

How To Choose Exchange Traded Funds

When selecting income producing ETF’s and allocating assets to these various funds, planning for income in retirement and managing portfolio risk becomes a bit easier!  Take this sample portfolio for instance:

iShares MSCI Pacific Ex. Japan (EPP) 20%
The fund uses a representative sampling strategy to try to track the MSCI Pacific ex-Japan index. The index consists of stocks from the following four countries: Australia, Hong Kong, New Zealand and Singapore. This investment is non-diversified.

This ETF is down over 12.0% so far this year and now sports a juicy Dividend Yield of 5.25%, while holding the expense ratio at 0.50%. This may present an excellent buying opportunity for a long-term investor.

BLDRS Developed Markets 100 (ADRD) 30%
For exposure to Japan, The United Kingdom, France and Germany, ADRD does the trick just fine as it seeks to provide investment results that correspond, before fees and expenses, to the price and yield performance of the Bank of New York Developed Markets 100 ADR Index.
ADRD provides a Dividend Yield of 2.88% and has an extremely low P/E ratio of just 9.36.  The expense ratio for ADRD is reasonable at 0.3% with a standard deviation of 9.69. 

iShares Dow Jones Select Dividend (DVY) 35%
The fund uses a representative sampling strategy to track the Dow Jones Select Dividend index. The index is comprised of one hundred of the highest dividend-yielding securities (excluding REITs) in the Dow Jones U.S. Total Market index, a broad-based index representative of the total market for U.S. equity securities.

This Dividend ETF Yields a respectable 4.5%, making it well worth the tiny expense ratio of 0.40%.  DVY also sports a relatively low standard deviation of 6.64, allowing you to sleep at night during your retirement!

Vanguard REIT Index (VNQ) 15%
The Vanguard REIT ETF seeks income and moderate long-term capital growth. The fund normally invests at least 98% of assets in stocks of real estate investment trusts (REITs) that are included in the Morgan Stanley REIT index.

Real Estate Investment Trusts have long been used in retirement portfolios for their income producing nature and this ETF is no exception.  VNQ delivers a 5.1% Yield and has a return of 2.29% YTD.  As usual, Vanguard keep their expenses to the bare minimum at 0.12%.

The Story Behind The Story
This portfolio is not necessarily built for tax efficiency, but the use of Exchange Traded Funds and the emphasis on dividend income is taylor made for retirement planning.  This portfolio covers a host of asset classes as well as having a great geographic asset mix.  I am a huge believer in investing outside of North America in order to capitalize on both capital growth and higher dividend yields offered in other markets.

Why Not Bonds?

I am not, however, a huge believer in fixed income going forward as the supply of money should be greater than the demand. Baby boomers will not be requiring loans, but will be investing their hard-earned savings. 
This coupled with pension fund managers seeing a 6.0% fixed income return as attractive will likely hold bond returns lower moving forward.  Money will be cheap for those of us looking to borrow.

That said, a portion of a portfolio dedicated to fixed income in retirement will certainly reduce risk.  However, with longer life spans, it is absolutely necessary to have capital growth in a retirement portfolio…we could live a lot longer than we think!

I certainly don’t want to run out of money, or places to spend it when I reach 114 years old.  But, I guess I’ll cross that bridge when I come to it …hopefully walking on my own two feet.


  1. A very interesting post. I strongly believe that you can create an income producing portfolio using dividend stocks and/or ETF’s. However, once you have retired, it would be wise to switch up to 20%-25% of your portfolio to fixed income. It would also be wise if you do not spend more than 3.5-4% of your portfolio’s initial starting point per year.

  2. I’ve looked into many of the ishares ETF’s offered on the Canadian market (and some from the US market), and I was a bit surprised that their distributions were as low as they are.

    For this reason, I’m not sure that these ETFs would be so great as income vehicles. Have you come across any that are?

    Mind you, I did overlook some of the main indices ETFs, such as the “composite” ETFs that try to cover the whole market. I’m talking mainly about the sector ETFs – the ishares REIT, for example, pays next to nothing compared with the income you would have if you just invested directly in the REITs themselves. In that case, I ask myself, why would I want to hold that ETF then?

  3. DGI,
    I am curious as to why you believe that a retired person would need to move a portion of their portfolio to fixed income investments?
    If they are living off of the cash flow from their nest egg, then the principal balance does not matter, so long as the cash flow continues.
    At this point in time, dividend yields are producing more income for these types of investors than fixed income options. In addition they have the opportunity to gain capital appreciation with equity investments.
    What is your take on this scenario?

  4. Don’t foget rising inflation:

    Zvi Bodie (a well respected Bostonian professor) writes about using Inflation-protected bonds (eg TIPS) for 95% of your portfolio! He recommends buying calls (over, say, the S&P 500) with the other 5% to gain exposure to the stock market upside. Smart.

  5. AJC,
    That is a very conservative strategy, but why use it when you can get dividend payments and capital apprecaition that, on an after tax basis, will provide you with substantially more income than TIPS.

  6. You are right. It is a powerful word and this is why.
    A well diversified Dividend ETF yields between 4-5% right now. Those dividends are taxed at 15% and the dividends are highly likely to increase at a greater rate than inflation.
    TIPS are taxed at your prevailing tax rate and there is no possibility for capital gain or increasing income at a greater rate than inflation.
    Just my $0.02!

  7. Tyler,

    In my dividend strategy I always look at the past 100+ years of stock market history in order to understand different what-if scenarios and be somewhat ready for them. You are correct that investing in the right dividend stocks could yield not only positive and growing cash flow over time but also substantial capital gains.
    However, if you look at the returns of a dividend investor, who retired in 1928 and was 100% in stocks at the time, you’d see that he would have suffered huge losses right away as well as dividend cuts. His portfolio would not have lasted for a long period of time. Had he added some bonds, he would have been better off.
    To summarize, a bond allocation in retirement would help you in a deflationary or low inflation environment, where stocks produce negative returns for a while.(like the 1929 crash for example).

    I do agree, however, that one shouldn’t really invest in bonds untill he/she has about 10 years to retirement.

    I have been working on this research for some time, but because I have been busier over the past several weeks, I haven’t had time to post anything on it.

    I hope this answered your questions!

    Dividend Growth Investor

  8. This may seem like a simple question but how do you receive the dividends from the ETF or is it held like a mutual fund? Is the dividends paid monthly depending on the stocks payout? I’m confused.


  9. I’m an investment advisor, I only do income type portfolios, dividends are the main focus. However, I do use a small percentage for bonds. No more than 9% right now. I see to much risk in the interest rate market for more exposure than that. I do love the 8% rate on the bonds I use, and good management (if you can find it) can get you some solid capital gains with that rate (currency, and rate actions). Fixed income investments can be very important, but I lean strongly to dividends right now with my rising income strategy.

    I’ll answer another one……ETF’s are all different but are much easier to understand than mutual funds. Just get on Google and DYDD! Many ETF’s pay monthly, some quarterly, but please understand that an ETF is not the individual companies in any way, all dividend policies are different and watch out for “leverage” or debt policies….DYDD!!!!

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