5 Top Income Investments for the Second Half of 2024

Even when the market is in rip-roaring growth mode, most investors in or nearing retirement are wise to consider adding income-producing assets to their portfolios.

These assets typically don’t have the same returns as growth stocks, but they also carry less risk.

Income-producing assets provide steady cash flow and can mitigate equity market volatility. That can help smooth an investor’s total return, meaning there’s less ground to make up in a year such as 2022, when the broad market posted a decline.

The rise in interest rates over the last few years resulted in some investors being able to dial back their equity exposure in favor of income-generating assets, says Dan Tolomay, chief investment officer at Trust Company of the South in Raleigh, North Carolina. That lowers portfolio volatility.

Within client bond portfolios, Tolomay says, he removed short-term bond positions that were in place to lower interest rate risk and hedge against rising rates. As the Federal Reserve eases interest rates, longer bonds may be beneficial.

“We have increased our duration, or interest rate sensitivity, to be in a position to benefit from the market’s expectation for lower rates from the Fed,” he adds. “We expect money market yields to follow the fed funds rate lower when the Fed eases.”

Widely used income-producing investments include:

Bonds offer stable income and lower risk compared to stocks, which means they provide diversification and reduce portfolio volatility.

The bond market is larger and more fragmented than the equity market, and because it doesn’t get as much attention, many investors don’t fully understand it. Investors can choose to purchase individual bonds or opt for a bond exchange-traded fund, such as the iShares Core U.S. Aggregate Bond ETF (ticker: AGG) or the Vanguard Total Bond Market ETF (BND).

“Buying bonds outright is very different from a bond ETF,” says Jacqueline Schadeck, a certified financial planner and CEO of Golden Wealth Strategies, headquartered in Atlanta.

The choice between individual bonds and an ETF depends on one’s overall investment strategy, she says. Another option is an actively managed bond mutual fund.

“If you’re looking for more active management in your portfolio but you don’t want to be the one to buy and sell the bonds, consider a bond mutual fund,” Schadeck says. “If you’re OK with passive management, meaning less of the active buying and selling, then a bond ETF may be right for you.”

Bond investors must also be cognizant of factors such as interest rates and credit quality.

“Right now, we believe some specific types of short-term corporate paper are attractive,” says Stash Graham, managing director of Graham Capital Wealth Management, headquartered in Washington, D.C. “If you invest in individual bonds like we do and are patient, you can find investment-grade, good-quality bonds yielding over 6%,” he says.

Stocks that pay dividends are usually issued by well-established, financially stable companies. They’re often less volatile than growth stocks because they provide regular income, attracting long-term investors rather than traders looking for a fast price move. In addition, these companies’ stable earnings can reduce price fluctuations and offer a cushion during market downturns.

“Dividend-paying investments have long been utilized by retirees looking for passive income, but since Meta Platforms Inc. (META) paid its first regular dividend in early 2024, many younger investors are now considering the impact dividend-paying investments can have on their portfolios,” says Chris Rahemtulla, a CFP and financial guide at New York-based Fruitful.

He cites reinvestment, another benefit of dividend-paying stocks. “If you do not need the income stream from dividends, you can reinvest your dividends to purchase additional shares of the company, and in turn, generate more dividends,” he says.

As with other investable asset classes, investors can opt for an ETF or mutual fund focused on dividend stocks. The Vanguard Dividend Appreciation ETF (VIG) is the largest dividend growth ETF, with about $78 billion in assets under management. It tracks an index of U.S. companies that have increased their dividends annually for a decade or more, and has a yield of 1.8% with a low 0.06% expense ratio. VIG’s one-year return is 20.4%, matching its benchmark, and it has a five-year annualized return of 12.9%.

You’ll often find master limited partnerships in the energy industry. These are publicly traded vehicles that combine the tax benefits of partnerships with the liquidity of stocks, and often pay shareholders a high yield.

For example, one of the largest MLPs is Cheniere Energy Partners LP (CQP), which operates in the liquefied natural gas industry. You’ll often find MLPs in the “midstream” area of the energy industry, active in pipeline transportation and energy storage.

Cheniere’s forward yield is 8.1%. MLPs are attractive to income investors due to their high yields, as they are required to distribute a portion of their cash to shareholders.

“We believe we are still in the midst of a multiyear rally for these once-maligned assets,” says Graham.

By law, REITs must distribute at least 90% of their taxable income to shareholders. This offers consistent, reliable income and can help diversify a portfolio with an asset class that is typically less correlated with the stock market than other types of investments.

“REITs are a great way to invest in real estate without having to outright own the property,” says Schadeck, adding that there are multiple types of REITs that can help diversify a portfolio from the typical stock-and-bond holdings.

For example, Graham cited REITs within the multifamily sector as a current opportunity.

“Considering a couple of variables, interest rates and lender interest, we have witnessed a significant drop in the number of construction projects started within the multifamily sector,” he says.

“Fundamentally, this should put a ceiling on new supply over the near term,” Graham says, adding that if demand for high-quality multifamily rentals continues to grow, investors may see a tailwind for underlying earnings in the coming years.

However, he adds, “Real estate is an interest rate-sensitive sector, and if the 10-year U.S. Treasury interest rate were to move higher, this would put downside pressure on the entire industry, as we have witnessed over the last two years.”

Annuities are insurance products that provide a steady income stream, typically for retirement. Annuities can offer fixed or variable payments; many annuity owners appreciate the regular income from these products without the stock-market risk.

The contracts are often complex, and would-be annuity owners should make sure they understand exactly what they’re buying, and if it’s even necessary. In some situations, an investment in stocks or bonds is more suitable than an annuity and may come at a lower cost.

However, the right annuity can be an appropriate purchase for someone seeking income.

Russell Hackmann, a chartered financial analyst and president of Hackmann Wealth Partners in Boston, says his firm likes lower-cost fixed annuities, rather than variable annuities, in today’s market.

“For people requiring guaranteed lifetime income in place of the pension they don’t have, annuity terms are attractive now,” he says.

“For folks less focused on income but looking for a ‘safe’ alternative to bonds, we like principal guaranteed fixed indexed annuities with stock market upside of about 10% annually,” he adds, referring to a product that protects annuitants from market downturns with a guaranteed return.

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