5 ETFs Retirees Can Use for Monthly Income Without Covered Calls

Covered calls can help generate income, but they also limit upside when stocks rise. These five monthly-paying ETFs look elsewhere for cash flow, relying instead on dividends, preferred shares, and bonds — though each one comes with its own risk.

Many well-known monthly-income ETFs pay part of their distributions by writing call options on the stocks they own. That approach, known as covered calls, can produce option premium right away, but it also means the fund gives up some gains if the underlying stocks surge. Many investors accept that trade-off. Others, including some retirees, prefer to preserve upside and collect income only from dividends and interest.

For those investors, five funds stand out: Invesco S&P 500 High Dividend Low Volatility ETF (NYSEARCA:SPHD), Global X SuperDividend U.S. ETF (NYSEARCA:DIV), Invesco Preferred ETF (NYSEARCA:PGX), iShares 5-10 Year Investment Grade Corporate Bond ETF (NASDAQ:IGIB), and iShares Treasury Floating Rate Bond ETF (NYSEARCA:TFLO). Each has a monthly payout record, and each draws income from a different source.

SPHD: Dividend Stocks Chosen for Lower Volatility

SPHD follows an index of 50 S&P 500 securities that have historically combined relatively high dividends with lower volatility. A recent holdings filing listed telecom, consumer staples, utilities, REITs, energy, and financials among its positions. No holding made up more than 3.41% of net assets, and total assets were about $3.41 billion.

The most recent monthly distribution was $0.2014 per share, bringing trailing 12-month payouts to roughly $2.49. Shares were trading near $52.77, with an adjusted gain of 18.08% over the past year. Even so, this remains an equity fund: it can fall during market sell-offs, and the companies it owns can reduce their dividends.

DIV: High-Yield Stocks, with More Risk Attached

DIV tracks 50 equally weighted common stocks, including master limited partnerships and REITs, selected from among the largest dividend payers in the United States. A recent filing showed holdings in pipeline partnerships, shipping companies, healthcare REITs, utilities, and tobacco. Net assets were around $783.8 million.

The fund has paid $0.106 a month since May, with an additional $0.016973 paid in June. Its adjusted share price has risen 19.11% over the past year. Even so, the monthly payout was higher in earlier years, including $0.1565 in 2019, before declining later.

PGX: Preferred Shares Paid Ahead of Common Stock

Preferred stock sits between bonds and common shares. It generally pays a fixed dividend, and preferred holders are paid before common shareholders but after bondholders. PGX aims to place at least 80% of its assets in fixed-rate, dollar-denominated preferred securities. Its latest distribution was $0.06052, up from $0.0573 the prior month.

There are three main risks to keep in mind. Preferred shares tend to be sensitive to interest-rate changes, and the fund’s shares have fallen 7.35% over the past year to about $9.93. It also has a heavy financial-sector tilt, with banks and insurers making up much of the portfolio. In addition, issuers can call preferred securities early, usually when rates decline, forcing the fund to reinvest at lower yields.

IGIB owns investment-grade corporate bonds with maturities of five to 10 years. The fund manages about $18.72 billion across issuers in technology, health care, utilities, and banking. Its largest disclosed position represented just 0.22% of net assets. Shareholders received $0.220684 per share in a recent payment, and trailing 12-month distributions came to about $2.60.

This fund carries both credit risk and interest-rate risk. With the 10-year Treasury yield near 4.90%, IGIB’s adjusted share price has gained only 0.19% over the past year. It also has no set end date: as bonds mature, the portfolio keeps replacing them, so principal is never returned all at once, and the share price can decline.

TFLO: Treasury Income That Moves With Short-Term Rates

TFLO tracks an index of U.S. Treasury floating-rate bonds and currently holds about $7 billion in assets. Because the interest on these securities resets with short-term rates, the share price has tended to remain relatively stable. The fund is up 0.36% over the past month and 4.01% over the past year on an adjusted basis, though losses are still possible. Its latest distribution increased to $0.171627, while the fed funds upper bound stood at 4.00%.

Why Different Income Sources Can Help Balance Risk

Each of these funds depends on a different driver. SPHD and DIV rely on corporate dividends. PGX and IGIB are influenced by interest rates and credit conditions. TFLO’s income is tied to short-term rates. Those pressures do not usually strike all at once, which is why combining them can help spread risk. For retirees looking for monthly income without covered calls, these five ETFs offer five separate ways to generate cash flow.