$100,000 in These 3 ETFs Pays About $465 a Month From T-Bills and CLOs: No Dividend Stocks, Almost No Rate Risk

Income investors do not have to own dividend stocks to generate a meaningful monthly check. An equal $100,000 split across the iShares 0-3 Month Treasury Bond ETF (NYSEARCA:SGOV), Janus Henderson AAA CLO ETF (NYSEARCA: JAAA), and Eldridge BBB-B CLO ETF (NYSEARCA:CLOZ) currently produces roughly $465 a month based on trailing distribution yields. The portfolio gets there without owning a single dividend stock and with very little traditional interest-rate exposure. Instead, SGOV owns Treasury bills, while JAAA and CLOZ invest in floating-rate collateralized loan obligations. That combination gives income investors three different steps up the risk ladder without requiring a move into equities.

SGOV: Start With Treasury Bills

SGOV is the simplest piece of the portfolio. The roughly $107 billion ETF tracks Treasury securities with three months or less remaining until maturity and charges just 0.09% annually. Its effective duration is currently only 0.11 years, which means changes in longer-term interest rates have almost no direct effect on the portfolio.

As of September 2, its 30-day SEC yield stood at 3.63%, while its trailing 12-month yield was 4.06%. At the latter figure, $33,333 invested in SGOV corresponds to roughly $1,353 of annual income, or about $113 per month based on the trailing payout rate.

The trade-off is straightforward: SGOV carries the least credit and duration risk of the three funds, but it also produces the lowest income. If the Federal Reserve keeps cutting short-term rates, the fund’s distributions should eventually follow Treasury bill yields lower.

JAAA: More Income Without Moving Far Down the Credit Ladder

JAAA takes things a step further. Rather than government debt, the $30 billion fund invests primarily in AAA-rated collateralized loan obligations. CLOs are pools of corporate loans divided into different layers of risk, and AAA tranches sit at the top of that capital structure.

JAAA’s trailing 12-month distribution yield was 5.34% as of September 1, while its most recently reported 30-day SEC yield was 4.87%. On a $33,333 allocation, the trailing distribution rate works out to approximately $1,780 annually, or $148 per month.

The attraction is not simply the higher yield. CLO coupons generally float with short-term rates, leaving JAAA with far less duration exposure than a conventional portfolio of intermediate- or long-term bonds. As a result, investors are taking credit and structured-product risk to earn that extra spread. That said, JAAA should not be confused with a Treasury substitute.

CLOZ: Where Most of the Extra Income Comes From

CLOZ is the aggressive choice of this three-fund portfolio. Unlike JAAA, CLOZ is designed primarily around lower-rated CLO tranches, investing at least 80% of assets in CLOs rated between BBB+ and B- at purchase.

The difference in credit is important because it explains the substantially larger paycheck. CLOZ’s trailing distribution yield currently sits around 7.35%, with a 30-day SEC yield of approximately 6.73%. Put $33,333 into the fund and the trailing distribution rate translates into roughly $2,450 annually, or $204 per month. Combined with SGOV and JAAA, that brings the equal-weight portfolio to approximately $5,580 a year, or $465 per month.

CLOZ’s floating-rate holdings keep conventional duration risk low, but the higher yield comes with materially more credit risk. During a recession or deterioration in leveraged-loan markets, these lower-rated CLO tranches can experience wider spreads and larger price declines even if Treasury yields are falling.

What This Means for You

For an investor who wants monthly income without building a portfolio around dividend stocks, the combination outlined here fills an interesting middle ground between cash and traditional high-yield bonds.

SGOV provides the Treasury anchor, JAAA adds higher income from top-of-the-stack CLO exposure, and CLOZ pushes the portfolio’s yield higher by accepting more credit risk.

It is worth noting that the roughly $465 monthly figure is a trailing run rate rather than a guaranteed paycheck, and distributions can decline as short-term rates fall. Still, the structure shows that generating roughly a 5.6% cash distribution rate does not currently require owning dividend stocks or taking substantial duration risk. The bigger decision is how much credit risk an investor is willing to accept to move from SGOV’s roughly 4% trailing yield toward CLOZ’s 7%-plus payout.

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