Intrepid Income Fund
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Income is an important component of any retirement portfolio. The challenge for retirees seeking income is not taking on too much risk in the process. Often funds with the highest yield are less diversified and riskier than their lower-yielding brethren.
Investing in a riskier fund is fine if you do it in moderation and plan to hold for the long haul. As long as you don't need to sell the fund, you can continue taking the income from its yield and not worry what the price does. Also keep an eye on fees, as actively managed income funds can creep up the expense scale. All that said, here are five solid income funds for retirement investors who can tolerate a bit of bump in their ride:
If yield is what you're after, Intrepid Income Fund (ICMUX) should be on your radar. With a trailing 12-month yield of 6.39%, this is a fund to write home about. As is always the case with yield, higher return often comes with higher risk, something retirees should consider carefully.
ICMUX portfolio manager Hunter Hayes says his team seeks returns in excess of inflation, but with a conservative risk profile by focusing on smaller issue bonds with relatively short maturities that they believe offer a premium to other fixed-income securities.
"We believe we receive a small issue premium by owning these issues that bigger asset managers cannot," Hayes says. They also focus on unrated securities that "get no love from larger asset managers" with mandates to only own rated bonds, but which the team believes are creditworthy based on their internal rating model.
Lastly, to further mitigate risk, the managers limit the duration to give themselves better visibility into
the company's ability to repay its debt and
reduce the risk of rising inflation.
As a result of these measures, the fund has high return compared to the category average with below average risk, according to Morningstar. Also noteworthy is that under Hayes's management since January 2019, the fund has risen from a one-star Morningstar fund to a four-star fund.
Vanguard Wellesley Income Fund
The Vanguard Wellesley Income Fund (VWINX) focuses on sustainable income by investing around 35% of the portfolio in strong dividend-paying companies with a higher dividend yield than the S&P 500 (.SPX) at the time of purchase.
The remaining 65% is then invested in fixed-income securities, most of which are investment-grade corporate bonds. The fund's longer duration, or how long they lend a company money, does make it more sensitive to interest rate swings as it can't replace old bonds as quickly when rates change.
For an expense ratio of 0.22%, however, its trailing 12-month yield of 2.35% is well worth the price. If you have $50,000 to invest in the fund, you can use the cheaper Admiral (VWIAX) share class, which has the same benefits for a 0.16% expense ratio.
Fidelity Strategic Income Fund
Invesco Rochester Municipal Opportunities Fund
Invesco Senior Floating Rate Fund
Another income fund Bergquist has turned to for many years is the Invesco Senior Floating Rate Fund (OOSAX), which invests in floating rate loans. "The Invesco Senior Floating Rate Fund is a great fund that will 'float up' with interest rates," he says. "So, in today's interest rate environment, this fund would perform well."
It also has an impressive 4.28% trailing 12-month yield, but like ORNAX, comes with a hefty price tag if your broker doesn't waive the 3.25% sales load.
It's also not without its risk, as is generally required if you want a high yield: While the fund's new lead manager has reduced the fund's equity exposure and over-concentrations, the portfolio still leans on lower-rated loans and stocks more than its peers.
Intrepid Income Fund (ICMUX)
Vanguard Wellesley Income Fund Investor Shares (VWINX)
Fidelity Strategic Income Fund (FADMX)
Invesco Rochester Municipal Opportunities Fund (ORNAX)
Invesco Senior Floating Rate Fund (OOSAX)
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Designed to provide high current income while also keeping an eye on capital preservation, the Fidelity Strategic Income Fund (FADMX) is a good income option for retirees with moderate risk tolerance.
The fund offers above average returns with average risk compared to the multisector bond category, which is to say it does come with some risky characteristics. It invests primarily in high-yield bonds, which can translate to higher credit risk and more volatility than some retirees may care for. It is currently yielding around 3.34%.
An expense ratio of 0.67% puts it below average for fees relative to peers. Morningstar's analysts like it for its low cost, "well-defined and repeatable process, experienced leadership and deep resources" thanks to having Fidelity as its parent company.
John Bergquist, managing member of Lift Financial, has used the Invesco Rochester Municipal Opportunities Fund (ORNAX) in client portfolios for more than a decade. The fund stands out from peers for its 4.23% trailing 12-month yield, but it's recent rate hike also rises above the category average.
The fund carries up to a 4.25% front-end load, so unless you purchase it through a broker that waives the fund's sales loads, it may not be the most economical option. Being a municipal fund means investors get the added benefit of tax-free income, which means you should hold this fund in a taxable account so you don't negate that benefit.
Bergquist adds that ORNAX is a higher risk fund compared to other income funds, "so it needs to be used as part of a diversified portfolio, not as a standalone." ORNAX is ranked No. 1 in the high yield muni category by U.S. News & World Report.
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