ETFs
These 3 Dividend ETFs Are Retirees’ Best Friends
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 working years ahead of them should prioritize investing 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 people in or near retirement should consider owning. While any one of them would fit into most retirement portfolios, together the three would make for a very well-rounded income-generating engine.
Vanguard Dividend Appreciation ETF
It’s easy to become so seduced by high dividend yields that you forget about dividend growth and capital appreciation. But it’s just as easy to fall into the opposite trap. That is, your search for reliable dividend growth can easily blind you to the fact that a yield is suspiciously low relative to alternatives or that there’s little hope for meaningful capital appreciation.
THE Vanguard Dividend Appreciation ETF (NYSEMKT:VIG) offers an acceptable balance of all these dynamics.
As its name suggests, the Vanguard Dividend Appreciation Fund’s primary objective is to generate sustained dividend growth over time. And that’s exactly what happened. Last year’s total payout per share of $3.21 was more than double the $1.39 payout in 2013. Standard & Poor’s Credit Rating Requirements for Inclusion in the Underlying US S&P Dividend Producers hint. S&P only considers companies (of all market capitalizations) that have increased their annual dividend payouts for at least 10 consecutive years, then eliminates the top 25% of these names on the assumption that these high yields portend potential challenges to the continued growth of their dividend payouts.
Seasoned investors 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 would a retiree not opt for the same ProShares S&P 500 Dividend Aristocrats ETF (NYSEMKT:NOBL) instead – especially given its higher yield of 2.3% compared to the Vanguard ETF’s current yield of just 1.8%?
There’s certainly nothing wrong with this alternative. But there’s a fundamental reason why VIG might make more sense for some retirees. Namely, with assets like Microsoft, VisaAnd Broadcom in its pool, the Vanguard Dividend Appreciation ETF offers more total upside potential without less potential for net dividend growth. It’s just a little more volatile in the meantime.
The story continues
* 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 position of not having enough income to pay all their bills right now. Schwab US Dividend Stock ETF (NYSEMKT: SCHD) is a wise addition to a position in the Vanguard Dividend Appreciation fund, while its 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 best-performing 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 Index 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 for inclusion in this index, regardless of their yield. In fact, there is a distinct 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 deposit, Amgen, Coca-ColaAnd Chevron.
You probably won’t see as many of them dividend growth of the Schwab US Dividend Equity ETF as you would the aforementioned Vanguard Dividend Appreciation, and you probably won’t see as much price appreciation either. However, you’re starting with an above-average yield and you’ll probably see less volatility. That counts for something, at least.
VanEck BDC Income ETF
Last but not least, income-conscious retirees may want to consider adding the VanEck BDC Income ETF (NYSEMKT: BIZD) to their retirement portfolios.
This is markedly different from the Schwab fund or the Vanguard fund, both of which hold only stocks. The VanEck BDC Income ETF only holds shares of business development companies (or BDCs), giving investors simple exposure to an income-focused slice of the market that remains largely obscure.
Business development companies are exactly what they say they are: they develop businesses. More specifically, they provide funding to budding companies that may not want to tap into the public markets, but also don’t qualify for a traditional bank loan. This money may be offered in exchange for an equity stake in the borrower’s organization. More often, however, it is made available in the form of a high-interest loan, reflecting the higher-than-average risk that these loans represent for the lender. That’s why the VanEck fund is yielding 10.1%. That’s the kind of yield the ETF’s holdings are currently posting.
There are tradeoffs to owning this high-yielding investment. One is the limited likelihood of significant capital appreciation. While there are some, the loans this fund makes to business development companies should be thought of as bonds, which are simply interest-bearing instruments that return your initial capital once the initial terms of the loan are repaid. Another tradeoff is the surprising amount of volatility this ETF can generate, given the underlying nature of the business.
The VanEck BDC Income ETF, however, has one major advantage that is 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 sure 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.
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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.
These 3 Dividend ETFs Are Retirees’ Best Friends was originally published by The Motley Fool