Morningstar best income funds

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Morningstar's Guide to Income Investing

Hell hath no fury like a retiree seeking income.

Although bond yields have ticked up during the past year, they’re nothing to write home about: As of this writing, the year Treasury bond yields % and the year Treasury bond yields %. Even though ongoing fiscal spending may bolster the economic recovery and stoke inflation, the Federal Reserve has made clear it has no plans to hike rates any time soon.

In the words of Warren Buffett, bond investors face a "bleak future."

So what’s an income-seeker to do?

Dipping a toe in more diversified bond “plus” funds or adding some other types of income-producing securities, such as dividend stocks, REITs, or preferreds, is one option.

Another is rethinking the idea of “income” entirely and instead focusing on generating cash flows in retirement.

“When yields are meager, as they have been for the past decade, pruning appreciated positions to meet living expenses is a way to raise cash while also reducing a portfolio's risk level,” explains Morningstar's director of personal finance Christine Benz. “Holding a cash ‘bucket’ and/or employing a simple annuity product are other tools that can help stabilize a retiree's cash flows.”

Morningstar’s Guide to Income Investing helps investors explore all their options.

Generating Income in Retirement

How to Extract Income from a Retirement Portfolio

We compare different strategies for generating cash flows, from pure total return to income-centric approaches to annuities.

Wade Pfau: The 4% Rule Is No Longer Safe

The noted retirement researcher discusses how pre-retirees and retirees can adjust their plans in times of market stress.

The Good News About Retirement Income

A lower starting withdrawal rate doesn't guarantee you'll have to live on less.

Should Retirees Adopt a Flexible Withdrawal Strategy?

Retirees should consider being flexible with their spending plan.

How Do Flexible Retirement Withdrawals Work in Practice?

Financial planner and retirement researcher Jonathan Guyton explains how to implement spending rules that fluctuate with the market--but not too much.

Will the Real Retirement Income Number Please Stand Up?

Is the 4% rule too high, too low, or just right?

Retirees: If You Love Income, You Should Love Cash Flow Even More

You diversify your investments; why wouldn’t you diversify how you source your in-retirement living expenses?

What Retirees Get Right About Their Retirement Income
Instinctively, they understand how to stretch their portfolios.

Is the Retirement-Income Party Finally Over?
Today's retirees will have difficulty continuing a long and happy trend.

When Higher Inflation Meets Your Withdrawal Rate
While few are predicting a s-style inflation spiral, it's still worth thinking through how inflation could affect your plan.

Wondering About Withdrawal Rates?
Noted retirement researcher and financial planner Jonathan Guyton visits to discuss his take.

Dividend-Paying Stocks

What's the Difference Between Dividend Yield and Dividend Growth Stocks?

Whether you're in the market for a company paying a juicy yield or one that's growing its payout, here are some things to keep in mind.

Top Dividend-Stock Funds
These mutual funds and ETFs pursue various dividend strategies and earn Morningstar Analyst Ratings for Silver or Gold.

10 Superior Dividend Stocks
These stocks are good choices whether you're looking for dividend growth, down-market defense, or inflation protection.

5 Dividend Stocks That Are Sustainable Twice Over
These stocks offer solid dividends and low ESG risk.

10 Solid Dividend-Paying Stocks on Sale
We think the payouts on these names are sustainable.

Fixed-Income Securities

The Best Taxable-Bond Funds

Here are the highest-rated mutual funds and exchange-traded funds across a series of taxable fixed-income Morningstar Categories.

A Checklist for Taxable-Bond-Fund Investors

Five considerations for those investing in fixed-income funds.

What Are Municipal Bonds?

These five questions can help you figure out whether to invest in municipal bonds (and the best way to do it).

The Best Municipal Bond Funds

Here are the highest-rated mutual funds and ETFs across a series of municipal bond fund categories.

For Bond Funds, Is Core-Plus Really a Minus?

Last year’s turbulent fixed-income market sheds some light on the limitations of intermediate core-plus bond funds.

Other Income-Producing Securities

3 Income Alternatives to Consider

There are risks and rewards for income-seekers who turn to preferred stocks, REITs, and core-plus bond funds.

Why Preferred Stocks Don't Make Good Bond Substitutes

Their yields might look tempting, but they come with a few drawbacks.

A 13% Yield: What Could Go Wrong?

There’s not much to like when it comes to structured notes.

Why I'm Lukewarm on Real Estate

Although attractive to yield-seekers, REITs aren't as compelling as they used to be.

Low Interest Rates, Unchartered Bond Markets, and the Income Conundrum
Extraordinary times may require adjusting expectations.


Is It the Right Time for Annuities?
Why investors should consider guaranteed income as part of their retirement strategy.

Using Annuities to Mitigate Risk
The Retirement Income Journal editor Kerry Pechter tackles common annuity misconceptions.

Do Annuities Belong in Your Retirement Tool Kit?

These vehicles can be bewildering.

Is an Annuity Right for You?

To understand whether these complicated products might suit you, start with the goals you have for your money.

Understanding the 4 Key Annuity Types

Annuities can offer valuable protection against outliving your assets, but they can also be high-cost and complicated. We dig into some pluses and minuses.

How to Invest in an Annuity

If you've decided to purchase an annuity, you'll also need to think through where to hold it, how much to annuitize, and when to make the buy.


Top Dividend-Stock Funds

Dividend-paying stocks are the Tom Hanks of investing: Everyone seems to like them.

Many retirees rely (at least in part) on the regular income that dividend stocks throw off. Nonretirees, meanwhile, enjoy "getting paid to wait"--or the idea of collecting quarterly income from stocks while holding on for stock price appreciation. Historically, dividends have been a key component of total returns, though that impact has been muted during the past several years as low- and no-dividend-growth stocks have driven a large portion of market return.

There are many fine dividend-focused mutual funds and exchange-traded funds to choose from. Today, we're shining a spotlight on some that focus on U.S. dividend-paying stocks and that earn Morningstar Analyst Ratings of Silver or better. (We expect such highly rated funds to outperform over a full market cycle.)

Not all dividend funds are alike. Most of the funds on this list pursue one of two approaches to dividend-paying stocks.

The first group favors what Morningstar's global director of passive strategies research Ben Johnson has called "yielders"--stocks whose yields are high in absolute terms. Such companies are usually more mature businesses that choose to pay out profits rather than reinvest them. You'll find these yielders largely in the financials, energy, utilities, and industrials sectors. Such stocks come with tantalizing yields but carry some risk. For starters, yielders in economically sensitive sectors may be vulnerable during an economic slowdown. Moreover, yielders face some interest-rate risk: When rates trend up, investors may swap high-income-producing stocks, especially in sectors like REITs and utilities, for bonds.

The second group of funds focuses on what Johnson calls the "growers"--companies that have increased their dividends over time. Growers typically don't boast burly yields like yielders do, though they have their advantages. Notably, companies that regularly boost their dividends are usually profitable and financially healthy. As such, these companies generally show some resilience during market downturns. Further, dividend-growth stocks can provide some inflation protection. "Income-focused investors receive a little 'raise' when a company increases its dividend," reminds Morningstar's director of personal finance Christine Benz.

Deep dive:What's the Difference Between Dividend Yield and Dividend Growth Stocks?

Of course, neither dividend-oriented strategy excels in every market climate. "Overall, though, they tend to hold up a bit better than average during times of market turbulence and have generated attractive risk-adjusted returns over longer periods," notes Morningstar portfolio strategist Amy Arnott.

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4 Fantastic Income Funds

Christine Benz: Hi, I'm Christine Benz for Morningstar. Among thousands of mutual funds, how can investors go about identifying the ones that are worthwhile? Joining me to share four income-friendly funds is Russ Kinnel. He's Morningstar's manager research director. Russ, thank you so much for being here.

Russ Kinnel: Glad to be here.

Benz: Russ, every year you take a look at the Fantastic It moves around a little bit, but you run a screen where you take the broad fund universe and you look at funds on a number of different variables, and you actually get it down to a fairly short, manageable list. This year it's how many, 36 funds?

Kinnel: It's 36 funds, yes.

Benz: You've got 36 funds. Let's talk about the screens that you put in and use to arrive at this shorter, more manageable list.

Kinnel: Sure. Well, the idea is that there's 8, funds out there, but really only a few data points that are particularly vital in selecting the best funds. So instead of having a lot of screens, what the idea is, just to have a few screens but really be stringent with each one of them, and a small number of funds comes out. Sometimes it's in the 30s, sometimes it's in the 40s, but it's just six core screens is all that I'm doing to get to that list.

Benz: Expenses, I know, are top of mind. What other things do you look at?

Kinnel: That's right, so cheapest quintile expense ratio, manager investment over $1 million, Parent rating of Above Average or High, medalist rating, so Bronze or better, and Morningstar Risk cannot be high. The idea is that high Morningstar Risk, people tend to have a harder time making good use of higher-risk, more-volatile funds, so we'll screen out just the high-risk funds.

Benz: In general, the idea with all of the criteria that you put in there, you're looking for better investor outcomes. You're looking for things that we have found are correlated with better performance.

Kinnel: Exactly. Manager investment is correlated with better performance. Low fees are correlated with better performance. Our Analyst Rating, we think, is correlated with better performance. Still, to a degree, you could say that the jury is still out on that one, but yeah, that's the basic idea.

Benz: You brought a short list of funds that cleared all of the hurdles for The funds that we're going to talk about today all do have some sort of an income focus, which I think is an interesting thrust to discuss, especially given how low yields are today. So the idea is that you brought a group of funds that you think have a sane approach to delivering investors income. Let's start with a fund that has been a longtime favorite among our readers and viewers. That's Vanguard Wellesley Income. It looks good and made it through your screens.

Kinnel: Oh yeah. Of course, it ticks all the right boxes. Vanguard, a great parent, super low fees, great track record. It's a fund that's to have beaten its benchmark over the manager's tenure, so really just does a great job on so many fronts. The idea is that they have 65% fixed income, 35% in equities, and the equities are also expected to generate a dividend. It's led by Michael Reckmeyer of Wellington, and obviously just a really great steady-Eddie fund. You just look at that year-on-year, consistently pretty good returns, pretty good yield, and of course, when you have fees as low as you get from a Vanguard fund, you don't have to stretch for yield. A manager with a fund that's charging 1% or % is going to have to take on a lot of risk just to get even with this fund, which is so cheap.

Benz: Next fund on your list that cleared the screens is American Funds American Mutual. Let's talk about that one.

Kinnel: We mentioned Wellington, who's good at investing in dividend stocks. Capital Group American Funds, this is also in their wheelhouse. They're just very good at finding good companies that pay a good yield. So they want--the target for this fund is to have a yield above the S&P , but they don't want to do so with a lot of risks. So they look for healthy companies as well. You can see that versus some other equity-income funds, this one doesn't have a huge weighting in energy utilities. You can see the consistent performance that, even in a year like this year where a lot of higher-yielding stocks got punished because there was a lot of credit risk there, this fund is just a very smooth sailor. Lost much less than its peer group, so really a strong Gold-rated fund.

Benz: Switching over to fixed-income funds, Fidelity Total Bond made your list. Let's talk about that fund, Russ, and I'd like to hear how it performed during the first quarter, which was such a great stress-test for bond funds.

Kinnel: Oh, sure. So this one's run by Ford O'Neil. It's in our intermediate core-plus fund category, which means these are a little more aggressive than the typical core fund. So what that means is you're going to have more credit risk. In particular, this fund has a 20% budget for high-yield and emerging markets, so it can be aggressive. But it is, like you see at a lot of Fidelity funds, it's very focused on issue selection, on quantitative research. And so the fund lost about in line with peers in the downturn, but is actually doing pretty well for the year to date. So I think pretty respectable. The fund's kind of managed nicely and when it has high-yield weightings and when it doesn't, and that really shown through this year, as well as over the long term.

Benz: And its name notwithstanding, it's not an index fund. It sounds like it could be, but it's not.

Kinnel: That's right. It's actually an active fund with more risk than a total bond stock or total bond market index fund would have.

Benz: And then Dodge & Cox Global Bond is also on your list. We also like Dodge &  Cox Income fund, but let's talk about the global bond fund.

Kinnel: Yeah. Our first three funds were kind of old-timers. This one's only been around for six years, and because I require manager tenure of at least five years, it's only recently become eligible, but I really like this fund. Dodge & Cox is really a company researcher, and so you see that reflected in the portfolio. It's about half corporate bonds, which is really unusual for a world bond fund. Most of those funds really love sovereign risk. They're betting on countries. Here, they're betting on individual securities because that's what Dodge & Cox does so well. They've got great analysts who are really good at researching the whole capital structure of a fund, of a company. And you see that in the performance. It's really good. And it's still a small fund. Under $1 billion. But what's great about Dodge and Cox is they charge a low fee from the beginning. So this fund charges 45 basis points. You don't have to wait for it to be massive to get a good value on the expense ratio.

Benz: Russ, if people want to see the whole list, they can look at Morningstar FundInvestor. This is in the August issue of FundInvestor, where you have all funds that cleared the screen. Is that correct?

Kinnel: That's right.

Benz: Russ, thank you so much for being here.

Kinnel: You're welcome.

Benz: Thanks for watching. I'm Christine Benz for


3 Vanguard Funds Rated 5 Stars by Morningstar

Vanguard funds, including exchange-traded funds (ETFs) and mutual funds, allow investors to obtain exposure to equity and bond markets at reasonable costs with highly competitive expense ratios in the fund industry. Vanguard funds typically come with no load fees, and many are available free of transaction fees through numerous investment broker platforms.

The Morningstar rating system is designed to weigh various factors of a fund, such as past performance, management, fees, and the process that a fund uses to select its holdings. Some Vanguard funds have a five-star rating from Morningstar.

The Vanguard Wellesley Income Admiral

The Vanguard Wellesley Income Admiral (VWIAX) seeks to attain long-term growth of income and a sustainable level of current income. As of , the fund allocates about 60% of its assets to bonds, including U.S. Treasury bonds, government agency bonds, industrial bonds, and mortgage-backed securities (MBS). Almost all of the Vanguard Wellesley Income Fund's bond holdings are investment grade. Since the fund has an average maturity of years in , its bond holdings are subject to interest rate risk. The remainder of the fund's assets are invested in U.S. stocks with a nearly 40% allocation and a small amount in reserves. Equity sectors are diversified amongst 11 categories, including consumer staples, financials, health care, and industrials. Vanguard Wellesley Income Admiral selects equities that have above-average dividends that are expected to grow in the future.

Vanguard Wellesley Income Admiral has experienced management that has a proven track record of delivering strong returns. From to , the fund has generated an annual average return of %. As of May 31, , the fund has a very low expense ratio of % and a day SEC yield of %. It is most suitable for investors who are interested in income investing at a very low cost.

The Vanguard High-Yield Tax-Exempt Fund Admiral

The Vanguard High-Yield Tax-Exempt Fund Admiral Shares (VWALX) invests its assets in municipal bonds with current income that is exempt from federal income taxes. The fund has a very conservative allocation that favors highly rated municipal bonds with credit ratings of A or above. Only about 43% of all bonds are rated BBB or below or with no rating as of , while the remaining 57% of the fund's holdings are A or above. The Vanguard High-Yield Tax-Exempt Fund has an average maturity of years, making it sensitive to interest rate risk. As of June 24, , the fund's day SEC yield stands at %.

From to , the Vanguard High-Yield Tax-Exempt Fund has generated an average annual rate of return of %. The fund has a very low expense ratio of % as of The Vanguard High-Yield Tax-Exempt Fund is most suitable for investors who are in very high tax brackets and would like to gain exposure to high-quality bonds exempt from federal taxes.

The Vanguard Tax-Managed Balanced Fund Admiral Shares

The Vanguard Tax-Managed Balanced Fund Admiral Shares seeks to provide exposure to mid- and large-cap stocks of the U.S. equity market. The asset allocation of the fund is % in stocks and % in bonds. The bond portfolio consists of federally tax-exempt municipal bonds.

From to , the Vanguard Tax-Managed Balanced Fund Admiral Shares has generated an average annual rate of return of %. The fund has a very low expense ratio of % and a day SEC yield of % as of May 31, The average maturity of the fund is years.

The Vanguard Tax-Managed Balanced Fund Admiral Shares is best suited for investors who are in higher tax brackets with investment goals of growing principal with the ability to absorb market volatility.


Funds income morningstar best

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How to Pick a Good High-Yield Bond Fund

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