These 3 index ETFs are retirees’ best friends

Each is attractive in its own right, but holding a stake in all three funds provides the kind of overall balance that most retirees need.

Most investors’ portfolios look different in retirement than during their working years. And rightly so. Investors especially need growth while they are working, when they have time to weather tough times. However, once they retire, they generally need income and stability from their investments.

There is one thing, however, that doesn’t change as investors move from their careers into their golden years. Simplicity always makes sense. Exchange-traded funds (or ETFs) still offer this simplicity, regardless of needs or goals.

With that in mind, here’s a closer look at three smart ETFs that are suitable for almost any retiree’s portfolio. It’s no coincidence that everyone is income-driven in one way or another.

iShares Preferred and Income ETFs

Most people understand that stocks and bonds are two completely different types of investments. But did you know that there is a category that combines elements of both?

They are called preferred shares. They are like obligations in the sense that their fixed dividend payments not only take priority over any dividends payable to other shareholders of that company (hence the name “preferred”), but also tend to provide higher returns than common stock of this company. Conversely, they are like stocks in the sense that only bondholders are true lenders and, as such, have a greater legal claim on a company’s cash flows and – in the event bankruptcy or liquidation – on its assets. Preferred stocks also generally do not produce capital appreciation. Their above-average dividend typically represents their entire reward and is typically paid quarterly, as with most other dividend-paying stocks.

But what amount are we talking about? THE iShares Preferred and Income ETFs (PFF -0.32%) currently has a dividend yield of around 6.3%. You won’t find much else with a comparable risk profile with this type of payment.

And there are risks, of course. Although preferred shares are less risky than the common stocks that investors typically buy and sell, it is not uncommon for a company to find itself unable to continue funding payments to an investor. It is also not always clear when such an event might occur. And like bonds, preferred stocks also rise and fall in response to changing interest rates, since both are issued at fixed interest rates. These price changes update their effective yields to reflect the interest rates in effect at any time.

The iShares preferred stock fund, based on the index of preferred and hybrid securities listed on the ICE exchange, however, addresses the main challenge of investing in preferred stocks. It’s all about finding them in the first place, including finding new ones as the older ones mature or retire.

By the way, the iShares Preferred and Income Securities ETF also pays its dividends quarterly.

Vanguard Dividend Appreciation ETF

While high dividend yields are nice, most investors understand that it’s also necessary to increase dividends in retirement. After all, according to the Social Security Administration, the average retirement lasts between 15 and 20 years, and many last longer. This leaves plenty of time for inflation to weigh on your budget. And you’ll probably need more income in the later years of your retirement than in the earlier years.

Enter the Vanguard Dividend Appreciation ETF (VIG -0.22%).

As the name suggests, the Vanguard Dividend Appreciation ETF’s primary goal is to hold stocks with a proven track record of dividend growth. Intended to mirror the S&P US Dividend Growers Index, this fund only holds S&P500 (^GSPC -0.04%) who have increased their annualized dividend payments for at least 10 consecutive years. Currently these names include Microsoft, VisaAnd JPMorgan ChaseJust to name a few.

And he did his job. The $3.23 per share distributions (an ETF version of dividends) that the Vanguard fund has distributed over the past four quarters are nearly double what it paid out a decade ago.

The trade-off is the relatively low yield that newcomers will connect to. Even though interest rates and dividend yields are above long-term norms, the Vanguard Dividend Appreciation ETF’s trailing 12-month return is only 1.6%.

Owners can take solace in the strong gains seen in this fund’s share price: it is up more than 130% over the past 10 years. But if you need more than a little income right away and need it with little capital, this Vanguard ETF isn’t ideal for the job on its own.

SPDR Portfolio S&P 500 High Dividend ETF

One way to meet this need for more immediate income is to take a stake in the SPDR Portfolio S&P 500 High Dividend ETF (SPY -0.25%).

As for Vanguard dividend appreciation fund, the name of this ETF says it all. The current dividend yield for the SPDR Portfolio S&P 500 High Dividend ETF is 4.7%. You can find higher yielding options, but you probably won’t get better returns without taking on a lot more risk and accepting a lot more volatility. Generally speaking, the SPDR fund is nearly 20% less volatile than the S&P 500 itself.

How does the ETF achieve this balance between low volatility and high dividend yields? Mainly by owning stocks that aren’t on most investors’ radars. The underlying S&P 500 High Dividend Index consists of approximately 80 of the best-performing S&P 500 companies at any given time. Currently, these companies include Iron Mountainwaste management company Public Service Company, International paperand toy company Hasbro. Boring? You bet. But being boring means that many of these less-traded stocks are also undervalued, which is why their dividend yields are above average.

There is one debatable downside. In other words, this SPDR fund capital appreciation lags behind the market as a whole. This is attributed to the fact that the ETF and the S&P 500 High Dividend Index it reflects are overexposed to lower-growth sectors like real estate, financials and utilities. The historical growth of its dividend payments isn’t exactly stellar either, more or less just keeping pace with inflation. This is not likely to change.

Still, the above-average dividend yield is attractive to retirees who need good income from their investments up front.

JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. James Brumley has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Iron Mountain, JPMorgan Chase, Microsoft, Vanguard Specialized Funds-Vanguard Dividend Appreciation ETF, and Visa. The Motley Fool recommends Hasbro and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

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