ETFs
These 3 Dividend ETFs Are Retirees’ Best Friends
This is when you need investment income the most. These choices will help you optimize this current and future cash flow.
No two investors are the same. However, it is reasonable to draw some general conclusions about investors as a whole. One is that people who still have many years of work ahead of them should invest primarily for growth, while retired investors should focus on generating reliable income from their savings.
With that in mind, here’s a closer look at three dividend-focused exchange-traded funds (ETFs) that retirees or those nearing retirement should consider holding. While any one of them can fit into most retirement portfolios, all three together would make for a very well-rounded income-producing engine.
Vanguard Dividend Appreciation ETF
It’s easy to get lured by high dividend yields to the point where you forget about dividend growth and capital appreciation. However, it is just as easy to fall into the opposite trap. Indeed, your quest for reliable dividend growth can easily distract you from recognizing that a yield is suspiciously low relative to alternatives or that there is little hope of significant capital appreciation.
THE Vanguard Dividend Appreciation ETF (VIG -0.04%) provides a pleasant balance of all these dynamics.
As the name suggests, the primary goal of the Vanguard Dividend Appreciation fund is to generate sustained growth in dividend payments over time. And that’s exactly what happened. Last year’s total payout per share of $3.21 is more than double 2013’s payout of $1.39. Credit Standard & Poor’s requirements for inclusion in the underlying S&P US dividend growth hint. S&P only considers companies (of all market capitalizations) that have increased their annual dividend payments for at least 10 consecutive years, then discard the top 25% of these stocks, assuming that these high yields portend potential challenges to the continued growth of their dividend payments .
Seasoned investors will probably know that inclusion in the list of so-called Dividend Aristocrats®* is slightly more difficult. These names must have produced at least 25 consecutive years of annual dividend growth and are also limited to S&P 500 actions. Given this more demanding requirement, why wouldn’t a retiree opt for the same ProShares S&P 500 Dividend Aristocrats ETF (NOBL -0.09%) instead – especially given its higher yield of 2.3% compared to the Vanguard ETF’s current yield of just 1.8%?
There is certainly nothing wrong with this alternative. But there’s a fundamental reason why VIG might make more sense for some retirees. That is to say, with assets like Microsoft, VisaAnd Broadcom Overall, the Vanguard Dividend Appreciation ETF offers higher total upside potential without reducing the potential for net dividend growth. It’s just a bit more volatile in the meantime.
* Dividend Aristocrats® is a registered trademark of Standard & Poor’s Financial Services LLC.
Schwab US Dividend Stock ETF
That being said, retirees certainly don’t want to find themselves in the situation of not having enough income to pay all their bills right now. Schwab US Dividend Stock ETF (SCHD -0.21%) is a wise complement to a position in the Vanguard Dividend Appreciation fund, while its current dividend yield stands at 3.4%.
This Schwab ETF is intended to reflect the Dow Jones US Dividend 100 index – a basket of the 100 most profitable stocks in the United States, excluding REITs (real estate investment trusts). Like the S&P US Dividend Growers Index on which the Vanguard Dividend Appreciation ETF is based, inclusion in the Dow Jones US Dividend 100 requires at least 10 years of uninterrupted annual dividend increases. However, unlike the S&P US Dividend Growers Index, all of these tickers are eligible to be part of this index, regardless of their performance. There is actually a particular preference for higher dividend yields.
Although the descriptions of the two ETFs are seemingly similar, there is actually some contrast. The Schwab fund’s top holdings currently include names like Home Depot, Amgen, Coca-ColaAnd Chevron.
You probably won’t see as many dividend growth You’ll get similar returns to the Schwab US Dividend Equity ETF, as you would with the Vanguard Dividend Appreciation mentioned above, and you probably won’t see as much price appreciation either. However, you start with an above-average return and you will likely see less volatility. At least that counts for something.
VanEck BDC Income ETF
Last but not least, income-conscious retirees may want to consider adding the VanEck BDC Income ETF (BIZD 0.65%) to their retirement portfolios.
It is significantly different from the Schwab fund or the Vanguard fund, both of which hold only stocks. The VanEck BDC Income ETF holds only stocks business development companies (or BDC), offering investors simple exposure to a largely undiscovered income-oriented part of the market.
Business development companies are precisely what they say they are: they develop businesses. Specifically, they finance emerging companies that may not want to go to public markets, but also don’t qualify for a conventional bank loan. This money can be offered in exchange for equity in the borrower’s organization. Most often, however, it is offered as a high-interest loan, reflecting the higher-than-average risk these loans pose to the lender. That’s why the VanEck fund’s current yield is 10.1% – that’s the kind of yield this ETF’s holdings are currently sporting.
There are tradeoffs to owning this high-yielding investment. One is the limited likelihood of significant capital appreciation. While there are some, the loans to business development companies in this fund should be viewed as obligationswhich are just interest-bearing instruments that give you back your initial capital once the initial terms of the loan are repaid. Another drawback is the surprising volatility that this ETF can generate, given the underlying nature of the business.
However, the key attribute of the VanEck BDC Income ETF makes it worth it for most retirees. This is a large (and surprisingly reliable) dividend that supports a yield that consistently exceeds prevailing interest rates at any given time. At the very least, you’re guaranteed to stay ahead of inflation with this fund.
Just keep in mind that you’ll want to own at least a few other less volatile dividend ETFs before jumping into this one.
James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Chevron, Home Depot, Microsoft, ProShares Trust-ProShares S&P 500 Dividend Aristocrats ETF, Vanguard Specialized Funds-Vanguard Dividend Appreciation ETF, and Visa. The Motley Fool recommends Amgen and Broadcom and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Mad Motley has a disclosure policy.