If I Had To Retire With Just 2 Funds, It Would Be These

Many investors like to build portfolios made up of many ETFs, CEFs, individual stocks, bonds, and preferred equities. One of the big reasons for this is simply for diversification, so that if they happen to make one or two grave mistakes, like buying Lumen Technologies (LUMN) or Medical Properties Trust (MPW) for their high dividend yields or betting on a high-growth speculative tech stock like Teladoc (TDOC) at $290 a share and ending up with just $11 a share three and a half years later, their entire investment portfolio does not get destroyed. While this certainly makes a lot of sense when investing in individual stocks, it makes much less sense when investing in well-diversified ETFs and CEFs. The reason for this is that while there is only a single ticker that you see on your screen, these funds really consist of hundreds of underlying securities in most cases and are already very well-diversified portfolios in and of themselves. As a result, especially if you’re going to choose well-diversified funds across sectors, it makes a lot less sense to hold a portfolio with a lot of ETFs and CEFs in it. Instead, if you want to take the passive approach to investing and avoid having to pick individual stocks and do the research required to succeed there, it may make sense to simply enjoy the benefits of simplicity and only own a handful of individual funds. In fact, keeping it simple not only means less work for you as an investor but also can mean that you are more likely to maintain proper diversification over time and be less likely to make rash and ultimately foolish decisions in the process because the fund itself will maintain your diversification for you. Whereas if you hold multiple funds, one fund may grow its principal more than the other, either due to differing dividend policies or simply due to the performance of the underlying holdings, meaning your portfolio could get out of whack. Moreover, if you have a multitude of funds in your portfolio and a certain sector crashes, or the market overall crashes, you may be tempted to dump certain holdings that then cause your portfolio to go out of whack. Whereas if you’re just focused on one or two well-diversified funds, you will not even have that option available to you, and you’ll be more likely to simply let your funds continue to ride and maybe even double down on your holdings through the turmoil. As a result, in this article, I’m going to explore this concept further and share that if I could only own two funds through retirement, it would be the Schwab U.S. Dividend Equity ETF (SCHD) and the Cohen & Steers Infrastructure Fund (UTF). In this article, I will discuss each of these funds and share why these are the two that I would pick.

Why SCHD ETF

I like SCHD as a retirement ETF and would hold it as an 80% position in this two-fund portfolio for the following reasons. First, it has an extremely low expense ratio of just 0.06%, which means that I will be retaining a lot more of my funds over the long term than I would otherwise. Second, its nearly 3.5% dividend yield, while not great, is much higher than many of its peers, like the Vanguard Dividend Appreciation Index Fund (VIG), which has a dividend yield of about half of SCHD’s. The Vanguard High Dividend Yield Index Fund ETF (VYM) also has a dividend yield that is quite a bit lower than SCHD’s, and the SPDR S&P 500 ETF (SPY) has a dividend yield that is roughly half of SCHD’s. As a result, it goes a lot further towards getting me to my 4% rule cash flow payout than the other funds and I can easily get there by allocating the remaining 20% of the portfolio to a higher-yielding CEF that gets me to that point so that I can live off of the 4% rule off of dividends from my portfolio without ever having to sell an individual share of either fund. Additionally, I really like SCHD because it has a five and ten-year dividend growth CAGR that is north of 10%, making it a powerful dividend growth engine. With it making up 80% of my portfolio in this hypothetical scenario, I’m set to enjoy very strong and dependable dividend growth (thanks to its 12-year dividend growth streak) that should beat inflation comfortably for years to come. Finally, I also like SCHD because it’s very well-diversified across numerous sectors, particularly the financial sector, the healthcare sector, the consumer defensive sector, the industrial sector, the energy sector, the consumer cyclical sector, and the technology sector. Moreover, with its 103 individual holdings, it’s well-diversified by individual stock, and virtually all of its holdings are high-quality blue chips that should be able to weather economic volatility for years to come.

Why UTF CEF

I would like to complement SCHD with the Cohen & Steers Infrastructure Fund because SCHD is very light on the utilities (XLU), communications, and real estate (VNQ) sectors, which are three sectors that UTF holds in quite large size, with over 50% of the fund invested in utilities, a significant amount invested in communications infrastructure, and also over 7% invested in real estate, with the remainder invested in other infrastructure companies. In particular, I like the fact that its top holding is American Tower Corporation (AMT), which gives very nice communications exposure that is severely lacking in SCHD. I also like UTF because it has a very consistent dividend history, paying out monthly dividends that have been sustained for years, including through the 2020 COVID lockdowns. I also really like its 8.25% dividend yield, which gets me to a roughly 4.4% weighted average total dividend yield when combined with 80% of the portfolio being in SCHD. This gives me not only the ability to live off of the 4% rule but ample breathing room, with an extra 10% above our living expenses in current income. Moreover, SCHD’s very strong dividend growth rate is likely to drive that up even more over time, as my income will likely grow at a rate that exceeds inflation moving forward. For those who have concerns about UTF’s expense ratio, it’s important to keep in mind that the 2.29% expense ratio listed on Seeking Alpha is misleading because it includes the leverage expense for the fund. Its actual expense ratio is 1.39%. While this is still high, it’s important to keep in mind that the fund’s leverage helps to support its surplus dividend yield and UTF currently trades at a slight discount to its net asset value.

Investor Takeaway

When combining the numerous advantages of SCHD with UTF’s successful track record of sustaining its very attractive dividend and UTF’s well-diversified infrastructure portfolio that helps to diversify SCHD’s portfolio effectively (including roughly 20% of the UTF portfolio invested in bonds and preferreds, adding a fixed income element to our overall portfolio), I think that the combination of these two funds provides a nice risk-reward balance that can be passively held, allowing a retiree to enjoy their golden years without having to worry about constantly monitoring and rebalancing your portfolio.