Mutual Funds with the stock market looking as if it is beginning to crest and interest rates starting their ascent, it may be time for retirement-income investors to emphasize total returns in their portfolio.
Total returns are generated from combining equities and fixed-income securities actively managed to achieve a balance of income, income growth and capital preservation.
The objective of total return or balanced funds is to generate a current income that can satisfy a desired drawdown percentage while growing capital at a rate to keep up with inflation.
There are dozens of mutual funds in this particular category, but these three funds are among the best for combining consistent performance and low cost, which are critical to a retirement portfolio.
Any of these funds can be considered core holdings for a retirement income portfolio, or the three together could form a diversified foundation for long-term total returns.
Vanguard Wellesley Income Fund
It is generally not recommended, but if you only wanted to own one mutual fund in your retirement account, the Vanguard Wellesley Income Fund may be your best candidate.
The fund uses a balanced approach that favors fixed-income securities (66%) over equities (33%) to generate high, sustainable current income along with moderate capital appreciation.
The fund’s objective is to seek consistent total returns that can keep up with inflationary pressures while maintaining a low volatility posture.
This is accomplished by spreading its $40 billion of assets among nearly 1,400 different holdings across investment-grade corporate bonds, U.S. government bonds and large-cap U.S. stocks.
Its stock portfolio emphasizes stocks of companies that pay above-average dividends or have an expectation of increasing dividends over time.
Although the fund is heavily weighted toward bonds, it consistently performs as well as many stock funds.
As of December 2015, it has generated an average annual return of 6.72% over the last 10 years and 7.36% over the last five years. For such a well-managed active fund, its expense ratio is a bargain at 0.25%.
T. Rowe Price Dividend Growth Fund
If you need high current income, the T. Rowe Price Dividend Growth Fund has proven it can deliver. The fund can be especially attractive to investors who feel the stock market may have a bumpy ride ahead.
With its concentration of large-cap dividend stocks, the fund’s managers believe that increasing dividends will be a major contributor to total returns over time.
Dividends also help to minimize portfolio volatility while providing a cushion for price declines. The fund is very selective, investing in just 111 securities with attention to large-cap companies that have long dividend-paying histories, such as Exxon Mobil, Pfizer, PepsiCo and Well Fargo.
The fund has performed well, returning 7.28% annually over the last 10 years and 13% annually over the last five years. Its 0.65% expense ratio is fairly reasonable compared with other funds in its category.
Schwab Balanced Fund
Dozens of funds are in the balanced category, but few stand out for their consistent performance at a low cost as much as the Schwab Balanced Fund.
As a balanced fund, its objective is to generate income growth on top of current income while preserving capital. It utilizes a fund-of-funds approach by investing in a diversified group of other Schwab or Laudus funds to achieve its objective.
It is more heavily weighted toward equities than fixed-income securities with a 55/65% to 35/45% allocation.
At any given time, the fund invests a minimum of 25% in equities and 25% in fixed-income securities, but it has the flexibility to get defensive by investing as much as 100% of its assets in cash or short-term obligations.
Over the past decade, the fund has returned 5.13%, and it has returned 9.04% over the past five years. It has a 0.62% expense ratio, which is fairly low for its category.