Building an Income Portfolio with Commission Free ETFs

Income portfolio strategies are characterized as those that, as the name implies, are building income in the form of regular dividends and paychecks to the investor. The focus is not necessarily on the appreciation and price of the ETF but on consistent and increasing income.

This sample portfolio makes use of commission free ETFs available through TD Ameritrade. This gives you the power to invest little amounts at a time, buying only one or two shares. Instead of being charged $7-10 per trade, you are charged nothing. This is one of the most powerful and lucrative ways to invest.

All of the securities chosen below are based on the best quality of the available commission free ETFs. No other broker offers as many.

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Income Portfolio Strategy and ETF Holding Breakdown

Percentage Holdings

• VIG – 40%

• BSV – 20%

• BLV – 20%

• RWX – 10%

• RWR – 10%

The strategy of this portfolio is to focus on income over a long period of time using dollar cost averaging. You are looking at 5 and 10 year returns, not monthly or annually.

As a result of low expenses and no commissions, after taxes you should be able to achieve 2-5% returns with minimal effort.

Dividend Paying ETFs

One of the most important elements to an income portfolio is the inclusion of securities that pay regular and consistent dividends. These are a favorite of investors because they tend to be very reliable and ever increasing year after year.

However not ever stock or security that pays a high dividend is a good choice. One should be looking at securities that provide a variety of different dividend yields and in different sectors. For example, one should own dividend securities that provide a small yield that is sure to increase over time while taking advantage of securities that have paid consistent payouts for decades.

Vanguard Dividend Appreciation ETF (VIG)

This index ETF seeks to mimic the Dividend Achievers Select Index. It specifically tracks long term and stable companies that have paid dividends for a long time and are likely to continue to pay earnings for decades to come. These are companies that everyone is aware of and covers a wide array of sectors.

Top Holdings Include: Walmart, McDonalds, Coca-Cola Inc., Exxon-Mobile, Proctor & Gamble, etc.

The VIG is heavily weighted towards industrial and consumer staples. Income investors are less likely to favor the hot stocks like tech and turn more towards value stocks. These securities rarely have wide changes in price and are appealing for dollar cost averaging.

REIT & Real Estate ETFs

REITs which is short for real estate investment trusts are one of the most lucrative securities available for a portfolio that many people do not take advantage of. REITs are companies that own a number of rental properties that pay out their income in the form of dividends.

What makes REITS valuable is that at least 90% of their income from rental properties must be paid out to shareholders! Most dividend stocks only pay out 1-4%! They do this to take advantage of income tax discounts. REITS can own rental properties in a variety of sectors such as housing, commercial and industrial sectors but also mortgages.

SPDR Dow Jones Wilshire International Real Estate Holdings (RWX)

This ETF tracks the Dow Jones Global ex-US Real Estate Securities Index. Its goal is to provide income to investors in solid companies outside the United States. International exposure is important in diversification both by geography and currency.

What I really like about this ETF is that it holds about 27% Europe, 20% Asia (developed), 17% Japan and Australia and just under 10% Canadian real estate companies. Less than 2% of this ETF focuses on emerging markets. This seeks to provide better stability and great chances of consistent income. 46% of holdings are large cap and 29% are medium cap.

I prefer this ETF over (RWO) which is also labelled as an international REIT ETF. However (RWO) holds more than 40% of its securities in US REITs. The goal here is to exclude the American holdings so that when we invest in a American based REIT ETFs we are not buying the same securities. This provides better diversification.

SPDR Dow Jones Wilshire REIT ETF Holdings (RWR)

This ETF tracks the Dow Jones US Select REIT Index. In this income portfolio (RWR) is providing the opposite of what (RWX) with strictly US exposure. Whether or not you believe in the US housing market or are concerned with mortgage rates, REITs continue to make money through rent.

(RWR) is well positioned for diverse income as it holds a variety of REITs in very different sectors. Housing and commercial properties are dominate. However, industrial buildings, healthcare buildings, agriculture, and utilities are also featured. A neat addition is public storage.

What I love about American REITs is that their share price rarely changes dramatically but the payouts remain fairly consistent.

Bond, Muni & Fixed Income ETFs

Bonds and fixed income are largely ignored by most investors due to their rather boring nature and predictle as well as relatively low returns. Their predictability though works to their advantage as they continue to provide consistent income to investors.

The greatest benefit of adding bonds and fixed income ETFs to your income portfolio is that they are guaranteed income for the investor, even though they are low. They will help round things out if the rest of the portfolio has an off year.

 Vanguard Short Term Bond ETF (BSV) & Vanguard Long Term Bond ETF (BLV)

I paired these two fixed income ETFs together because they both attempt to acheive the same goal with different long term outlooks. The short term ETF will provide balance against fluctuations in the REITs and dividend ETF while maintaining consistent, although low short term income. The long term bond will even out years that feature low returns in the S&P 500.

Both of (BSV) and (BLV) are weighted at about 85% American bonds and 12% International bonds. The remaining 3-4% is held in cash. Bonds are split fairly evenly between corporate issues and government issues, providing greater diversity. A small percentage, 5-6% is left to municipal bonds, which are usually seen as more aggressive and risky.

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