I Want to Invest $3 Million for $250,000 a Year in Dividends. What’s the Best Low-Risk Portfolio Mix?

If you’ve got a $3 million nest egg to put to work, a dividend-focused strategy could be the right fit for you. Even with such a towering fortune to invest, though, investors should resist the urge to maximize their yield. Undoubtedly, it’s certainly tempting to ditch the so-called 4% rule for the dust with the advent of numerous covered call and premium income ETFs (Exchange-Traded Funds) that offer 8% and sometimes more than 10%.

High-yield ETFs may be a great supplement, but may not be the best core holding in the world for an investor who values volatility stability (as I’ve explained in prior pieces, premium income ETFs can experience great flucutation in yield in any given month) and, perhaps more importantly, the means to grow one’s wealth over time via capital gains. Sure, it’s fine to be content with a big, fat yield and not give much, if any, thought to how much one’s shares stand to appreciate over time. But for investors of all ages, I do think that the impact of capital gains should play a larger role in influencing one’s long-term investment decisions.

In any case, let’s consider the case of a Reddit user from r/dividends who’s looking for a “low-risk” mix of assets that’s capable of generating a quarter million dollars worth of annual income (via dividends and distributions) with around $3 million in invested principal. It sounds like an achievable goal, but are higher-yielding stocks, REITs (Real Estate Investment Trusts), and ETFs really the right picks for a low-risk portfolio? Let’s find out.

Key Points in This Article:

• If you’re aiming for $250,000 in annual income, you’ll need at least 8.3% yield from a $3 million portfolio.
• Instead of yield-chasing, ETFs like the DVY can provide substantial yield and serve as the backbone of an income portfolio.
• A blend of covered call strategies and high-yield stocks can round out your dividend plan. 
• Should ETFs be a part of your investment strategy? Why not meet with a financial advisor near you for a complete portfolio review? Click here to get started today. (Sponsored)

An 8.3% Yield Is Needed to Generate $250k in Annual Income From a $3 Million Portfolio

Right off the bat, our Reddit user is breaking the 4% rule by targeting an amount of income that implies a yield just north of 8%. And while there are a growing selection of investment products as well as individual stocks that yield well north of that amount, I do think that one would either have to put themselves at higher risk of capital downside or cap their potential upside with a product such as a covered call ETF, which sells call options against held stocks. As always, a financial advisor would be able to provide the best advice for any individual’s goals.

And while I’m not against sprucing up a high-income portfolio with the likes of some specialty income ETFs, I do think that the “core” or bedrock of a so-called “low-risk” portfolio should be made of high-quality dividend stocks that can produce a good amount of capital gains in addition to dividend growth. Having a decent upfront yield of around 3-5% doesn’t hurt, either. Indeed, an advisor would be able to gather enough information to know what our Reddit user considers “low-risk” or “safe.”

Does that mean a low chance of dividend or distribution cuts? Or steering clear of significant downside in the face of a stock market meltdown”? It’s hard to say. Either way, I’d suggest starting with a dividend-focused broad ETF, like the iShares Select Dividend ETF (NASDAQ:DVY), which yields 3.7% at the time of writing, and going from there. High-yield REITs, covered call ETFs and individual dividend payers may be considered, provided one knows what they’re getting into.

Covered Calls & High-Yield: “Accidentally High” Dividend Stocks Are Popular Among Dividend Investors

Whether one chooses to go the route of covered call ETFs, which can be a good yield boost provided one knows the risks and trade-offs, or with distressed individual names that have “accidentally” high yields, investors should put in the work to value firms before buying shares of any company.

For someone with $3 million, I’d say there’s more than enough to hire a financial advisor who acts as a fiduciary. I think they’d suggest reducing one’s yield expectations. Perhaps it makes more sense to aim for a $150k annual income than $250k one. That’d entail a more conservative yield of 5% and allow for greater capital gains potential.

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