3 Income Funds You Should Hold In 2016

Forecasting where the market will end up in 2016 is a very difficult task, as innumerable variables will intercede over the course of the next twelve months. The actions of the Federal Reserve in particular are going to be a heavy influence on income investors as they seek to position their portfolios for capital preservation and dependable dividend streams.

If 2015 has taught us anything it’s that there is a high degree of risk in individual high yield sectors such as master limited partnerships and junk bonds. These groups have erased years of accumulated gains in a manner of months as credit headwinds weigh on investors’ minds. In addition, the trendless direction of interest rates will likely lead to above-average volatility in high quality fixed-income holdings as well.

My top income themes for 2016 are centered around large, diversified, and proven investment vehicles that circumvent the hit-or-miss proposition of individual sectors. That may seem boring to those who like to tempt fate with the glory of a turnaround story or make assumptions in continued strength of momentum names.

Nevertheless, I think you will find these actively managed mutual funds and low-cost ETFs offer attractive characteristics as core holdings for nearly every style of income investor.

Vanguard High Dividend Yield ETF (VYM)

If you are looking for an essential equity income fund to own in 2016, then VYM should near the top of your list. This exchange-traded fund houses 435 U.S. stocks with characteristics of consistently high dividend yields. Top holdings include well-known names such as Microsoft Corp (MSFT), Exxon Mobil Corp (XOM), and General Electric Co (GE).

VYM has exposure to virtually every sector of the stock market, which means that it is a highly diversified and transparent investment vehicle. I like to think of this fund as the “S&P 500 of dividend stocks” because of its market-cap weighted structure and broad index construction methodology.