IIf you’re mostly done working for a living and now rely on your nest egg to provide the cash to cover your expenses, a diversified portfolio of dividend-paying stocks might do the trick. However, there may be an easier and safer solution: dividend-oriented exchange-traded funds (ETFs). Beyond the fact that they can quickly provide you with greater diversification than you might typically achieve by picking stocks yourself, owning these funds will also allow you to focus on your golden years without having to keep a constant eye on your portfolio.
Here are three excellent dividend ETFs that current and future retirees should consider.
iShares Select Dividend ETF
Not that you should – or should – be limited to just one dividend-focused exchange-traded fund, but if you wanted to own just one, the iShares Select Dividend ETF (NASDAQ:DVY) is the one.
Designed to mirror the Dow Jones US Select Dividend Index, the ETF holds approximately 100 hand-picked high-yielding US stocks, each with at least five years of dividend-paying history. Most of his holdings, however, have track records much longer than that. Some of his most prominent positions include Altria, Valero Energyand IBM, and they are among the most important holdings, precisely because they show above-average returns. Collectively, the fund’s current dividend yield is nearly 3.2%.
The utilities sector is the fund’s largest, accounting for about a quarter of its assets. Most of the other sectors represent tranches of 12% or less, so the risks are fairly well spread. And utility industry players are arguably some of the most trusted dividend payers in the world, as people place an understandably high priority on keeping their lights on and water running.
While the iShares Select Dividend ETF is a great overall choice, like any other investment, it comes with a trade-off: while it will get you hooked into a healthy return now, you won’t necessarily see payments growth that beats inflation. This may not be a problem for you, but if it is, there is a solution.
Vanguard Dividend Appreciation ETF
This solution also consists of investing in the Vanguard Dividend Appreciation ETF (NYSEMKT:VIG). As the name suggests, its wallet was designed specifically to provide reliable payout growth over time.
The fund’s stock-picking strategy is quite simple: it replicates the S&P US Dividend Growers Index, which only includes US stocks with at least 10 years of history of annual dividend increases. This group includes nouns like Johnson & Johnson and Microsoft.
However, the index also excludes the top 25% of tickers who would otherwise be eligible for inclusion. The assumption of index managers is that if a stock’s return has reached such a high level, it ultimately carries too much risk – the remaining 75% will do just fine. The end result is great price stability, which most retirees want. The beta of this fund is only 0.84, which means that it only moves (on average) about 84% since S&P500 done on a given day.
The trade-off with this ETF is its relatively low yield – currently around 1.8%. So if you open a position, you won’t make a lot of money at first. It can still be worth it. The fund’s current annualized payout per share of $2.86 is nearly 70% higher than the fund’s dividend from five years ago, while ETF shares themselves are up more than 50%.
First Trust Preferred Securities and Income ETFs
Finally, if you’ve already secured some assets with reliable dividend yields and also added the potential for dividend growth, it wouldn’t be crazy to take a little more risk in an ETF designed to deliver significantly higher yields. students. This higher-risk holding should make up the smallest fraction of your dividend ETF holdings, and you still don’t want to risk a large portion of your portfolio. A fund that only holds preferred shares might do the trick, and the First Trust Preferred Securities and Income ETFs (NYSEMKT: FPE) is one of the best of this breed.
If you are unfamiliar, a favorite stock is something of a hybrid of common stocks and bonds. Most come with a fixed coupon rate, although unlike bonds, preferred stock dividend payments are not necessarily legal debt securities. That’s why they tend to offer higher yields than traditional bonds – there’s a bit more risk involved. Yet preferred stock dividends are almost always After guaranteed dividend payouts on companies’ common stock, which is why their returns are typically higher than those on the tickers most of us regularly watch. The downside: Preferred stocks rarely offer the potential for significant capital appreciation, unlike common stocks.
In other words, preferred stocks are only attractive if you’re looking for above-average yields right now and don’t necessarily need dividend growth or capital growth.
But what returns! The First Trust Preferred Securities and Income ETF’s current dividend yield is an impressive 7.4%, and the fund has been making some kind of monthly payout since 2013, when it was launched.
Again, this is not a great first or only dividend ETF. The payout hasn’t increased much over that nine-year period, and the ETF itself is more or less priced where it was when it launched. However, the owners have received large dividends all along, in an environment where yields and interest rates on other types of securities have been shockingly low.
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James Brumley has no position in the stocks mentioned. The Motley Fool has positions in and recommends Microsoft and Vanguard Dividend Appreciation ETF. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.