Retirees Are Ditching Stock Picking for This 6% Income Strategy

Stock picking can lead to tremendous returns, but choosing the wrong investments can set your retirement back by a few years. That’s why some investors focus on index funds and ETFs instead of researching individual companies. Index funds contain a basket of investments, and you don’t need many of these funds to construct a portfolio that aligns with your risk tolerance.

Some retirees are forgoing stock picks and multiple funds in favor of a 6% income strategy. Here’s how you can start generating higher yields.

Options Income ETFs

REITs

Real estate investment trusts are another group of assets that offer high yields and can get you to the 6% threshold. Realty Income (NYSE:O | O Price Prediction) is one of the most well-known REITs, and even though its 5.33% yield falls just short of the 6% requirement, monthly dividend payouts and annual dividend hikes introduce plenty of additional upside.

REITs invest in a wide range of real estate properties. Some REITs focus on a specific sector, such as healthcare properties and cell towers, while other REITs diversify their holdings across multiple property types. Realty Income is in the latter category.

The Downside Of High Yields

While the high yields from options income ETFs and REITs look attractive, there are two downsides to consider. The first disadvantage is that many of these funds trail the S&P 500 in the long run. While this is often a big deterrent for young investors, older investors may like the fact that these funds offer high cash flow and low volatility.

However, the second disadvantage affects everyone, and it’s something retirees should consider. The cash distributions from options income ETFs and REITs are treated as ordinary income. They are not qualified for long-term capital gains tax rates, and since they push your ordinary income higher, you can end up in a higher tax bracket. A higher percentage of your Social Security benefits may be eligible for taxation as well, depending on how much extra money you earn from options income ETFs and REITs.

It is much harder to find dividend stocks with yields above 6% that actually offer qualified dividends, the type of distributions that are eligible for the more favorable long-term capital gains tax rates. Verizon (NYSE:VZ) was a reliable choice for many years, but a 24% year-to-date rally in the stock price has reduced the dividend yield to 5.63%. That’s still much higher than the average stock, but it’s hard to find 6% yields unless you are willing to pay ordinary income tax rates for those distributions.