Income investing for retirement: pursuing income and growth

• Income investing has historically been a key part of retirement planning. But in today’s uncertain markets, an expanded toolkit of income solutions may be necessary.
• Different sources of income behave differently and may play a distinct role in portfolios. Combining them can potentially create a more resilient income stream.
• Investors in or near retirement may seek income from dividends, options strategies, short-term bonds and active fixed income via exchange traded funds (ETFs), which offer convenience, low-costs, tax-efficiency, and diversification benefits.

For decades, saving for retirement and income investments have gone hand in hand. But investors are facing new challenges, as traditional retirement plans may simply not be enough. In fact, only 38% of employers believe that the majority of their employees are truly on track for retirement.¹ While nearly two-thirds of investors worry that when retirement comes, they’ll run out of money. An astounding 86% of investors say they want guaranteed income.²

It’s also worth asking if income is simply enough? Many investors are now looking to strike a balance of both income and growth, especially as inflationary pressures are driving expenses higher.

Traditionally, income was sourced from two buckets: bonds and dividend stocks. Today, income can come from additional sources and strategies like premium income ETFs and active fixed income strategies. Investors can access these investments via ETFs, which offer diversification and liquidity.

Dividends are payments made by a company to its shareholders, most commonly in the form of cash. These dividend payments reward investors who hold the company’s stock, and some companies may pay higher dividends than others. Businesses showing financial maturity and/or stable cash flows tend to offer higher dividends than other companies.

But why does investing in dividends matter when saving for retirement? In a modern portfolio, dividends may provide regular income and diversify sources of returns, especially as many investors are facing concentrations risks due to how much of the U.S. stock market’s return is driven by AI-associated names.³

Dividends also potentially have lower volatility than the broad market. Diversification from bond income is also something to consider, especially as Fed easing may drive down rates, and falling interest rates typically mean bonds and cash may offer less income going forward.

As income opportunities evolve, it’s increasingly important to evaluate income opportunities on an after-tax basis. A key distinction for investors is the difference in taxation between qualified dividend income and interest income from a U.S. federal tax perspective.

• Qualified dividend income is generally taxed at long-term capital gains rates rather than ordinary income rates.
• By contrast, income from cash mutual funds and many taxable fixed income instruments is typically taxed as ordinary income.

Investment idea: Different types of dividends offer different types of yield and tax benefits as illustrated in the chart below. Dividend growth companies tend to have a sustained history of growing dividends, while High dividends come from companies that are screened for financial health and have a history of paying out relatively high dividends.

Investors interested in dividends as a potential source of yield may consider the iShares Core High Dividend ETF (HDV) while those interested in dividend growth potential may consider the iShares Core Dividend Growth ETF (DGRO). (Learn more about the potential tax advantages of ETFs).

Options are contracts between two parties who are willing to buy or sell an investment at a specific price in the future. By selling or writing call options on a stock, bond or other asset held in a portfolio, an investor can trade off upside appreciation for income (Learn more about options). Traditionally there have been barriers to many investors writing options, such as needing special permission on an investment account, as well as ongoing trading and maintenance of these strategies. But today, investors can access options strategies in an ETF wrapper providing convenience, transparency, and the potential for lower fees.

These 'premium income' strategies are designed to offer enhanced income from a unique source that is not predominantly tied to interest rates, credit risk, or corporate cash flows. Different premium income strategies may offer a variety of approaches, shifting the balance between upside participation and growth, or targeting different underlying assets (e.g. US Large Cap Stocks or Long-dated Treasuries).

Investment idea: Premium income ETFs such as the iShares U.S. Large Cap Premium Income Active ETF (BALI) seek to enhance monthly income generation through two sources – a dynamic, rotating basket of U.S. large cap stocks with attractive near-term income potential, and option premiums from selling call options on the S&P 500 index. Premium income solutions like BALI can offer enhanced income with the potential for growth to maintain purchasing power, which may help to maintain purchasing power, especially if inflationary pressures remain elevated. As illustrated in the chart below, enhanced income potential doesn’t necessarily have to mean taking on more risks.

On the other end of the fixed income spectrum, bonds backed by company earnings, consumer loans, real estate, or global governments may offer higher amounts of income, albeit with additional risk. Today, we’re facing a generational opportunity in fixed income, as yields have been elevated compared to years past.⁵ When accessing these riskier bond categories, solutions that invest across the full opportunity set may provide greater diversification, helping to limit volatility compared to any one sector.

Investment idea: A nimble, actively managed approach can potentially take advantage of a strong yield environment by seeking to provide maximum income in an active and risk-adjusted way. The iShares Flexible Income Active ETF (BINC), for example, aims to maximize long-term income without sacrificing quality or taking on additional risk. This multi-sector approach may also help provide greater diversification vs holding static allocations to higher risk sectors like emerging markets or high yield, without sacrificing quality (see chart below).

Retirement saving is becoming more complex. Fewer people feel on track for retirement, many fear running out of money, and the vast majority want reliable income streams. Traditional income approaches centered on income from bonds and dividend stocks but rapidly evolving markets have investors looking beyond income alone, toward strategies that also preserve growth.

Investors are now looking access a broader toolkit—expanding beyond traditional instruments into categories like options-based income and active fixed income—potentially through ETFs that simplify diversification. Each income source behaves differently, meaning combining them can help build a more resilient and adaptable portfolio. Tax treatment across different income investments may also be an increasingly important consideration.

Ultimately, retirement income today isn’t about finding a single solution—it’s about constructing a flexible, multi-source strategy. Empowering investors not just to sustain retirement—but to adapt and thrive throughout.