This post may contain links from our sponsors and affiliates, and Flywheel Publishing may receive compensation for actions taken through them.
If you have a $3 million nest egg to invest, a dividend-centered approach can be a great way to generate steady income. Even with a portfolio that size, it is important not to chase the highest yields you can find. With so many covered call and premium income ETFs offering 8 percent or even 10 percent yields, it can be tempting to forget the traditional 4 percent withdrawal rule. But maximizing yield often comes with hidden risks.
High-yield ETFs can work well as part of a portfolio, but they are not always the best foundation for investors who want stability and predictable income. These funds can produce large swings in monthly payouts, and they typically sacrifice long-term growth for high current income. It is easy to take a generous yield at face value and ignore how little your underlying shares may appreciate over time. Yet capital gains play a critical role in building and protecting wealth, no matter your age.
With that in mind, consider the case of a Reddit user from r/dividends who wants a low-risk portfolio that can generate about $250,000 in yearly income from a $3 million investment. The goal sounds reasonable on paper, but it raises an important question. Are high-yield stocks, REITs, and premium income ETFs really the safest way to reach that level of income? Let’s take a closer look.
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
If we look closely at this Reddit user’s goal, they are already stepping beyond the traditional 4 percent rule. Generating $250,000 a year from a $3 million portfolio requires a yield a little above 8 percent. While there are plenty of investment products and individual stocks that offer yields well beyond that, targeting such a high payout usually means taking on more risk. Investors may have to accept the possibility of sharper price declines or limit their future growth by relying too heavily on covered call ETFs, which generate income by selling call options on the stocks they hold. A financial advisor would be best equipped to match these choices with someone’s personal goals and risk tolerance.
Although high-income ETFs can be helpful additions, I believe the foundation of any truly low-risk portfolio should consist of high-quality dividend stocks. These companies offer a healthier balance of steady income, dividend growth, and long-term capital appreciation. A starting yield in the 3 to 5 percent range can still feel generous while keeping risk at a more reasonable level. An advisor could also help clarify what “low-risk” actually means for this investor. Does it mean avoiding companies that might cut dividends? Or protecting the portfolio from major losses during a market downturn? These details matter.
For most investors seeking stability, a broad dividend-focused ETF such as the iShares Select Dividend ETF (NASDAQ: DVY) is a solid place to begin. It currently yields about 3.7 percent and offers a diversified, quality-oriented approach. From there, higher-yielding REITs, covered call ETFs, and select dividend-paying stocks can be added, as long as the investor understands the trade-offs involved.
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.