If you’ve basically done your work for a living and are now looking for your reserves to fund your expenses, a diversified portfolio of dividend-paying stocks can do the job. However, there may be an easier and safer solution: dividend-oriented exchange-traded funds (ETFs). In addition to the fact that they can quickly provide you with more diversification than you would normally achieve by picking stocks yourself, owning these funds allows you to focus on enjoying your golden years instead of having to keep an eye on your portfolio.
Here are three great dividend ETFs that current and future retirees should consider.
iShares selects dividend ETFs
Not that you have to – or should – limit yourself to a dividend-focused ETF, but if you just want to own one, iShares selects dividend ETFs (NASDAQ:DVY) is this one.
Designed to mirror the Dow Jones U.S. Select Dividend Index, the ETF holds approximately 100 carefully selected high-yielding U.S. stocks, each with a dividend history of at least five years. However, most of its holdings have a much longer track record.Some of its biggest positions include Altria, Valero Energyand IBM, and they’re one of the larger holdings, especially because of their above-average yields. Overall, the fund’s current dividend yield is close to 3.2%.
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The utilities sector is the largest in the fund, accounting for about a quarter of its assets. Most other industries account for 12% or less, so risk is well spread. Players in the utility industry are arguably one of the most reliable dividend payers in the world, as people understandably put keeping lights and water a top priority.
While the iShares Select Dividend ETF is a great all-around option, just like any other investment, it does come with a trade-off: While it gives you healthy returns right now, you won’t necessarily see payout growth that exceeds inflation. This may not be a problem for you, but if it is, there are solutions.
Vanguard Dividend Appreciation ETF
The solution is to also invest in Vanguard Dividend Appreciation ETF (NYSE: VIG). As the name suggests, its portfolio is specifically designed to provide reliable dividend payout growth over time.
The fund’s stock-picking strategy is simple — it replicates the S&P U.S. Dividend Growth Index, which only includes U.S. stocks with at least a 10-year track record of annual dividend growth.The group includes names such as Johnson & Johnson and Microsoft.
However, the index also excludes the top 25% of stocks that would otherwise qualify for inclusion. The index manager’s assumption is that if a stock’s yield rises that high, it will end up taking too much risk — the other 75% will be fine. The end result is the price stability most retirees want. The fund’s beta is only 0.84, which means it’s only moving (on average) about 84% S&P 500 Any day.
The tradeoff 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 cash early on. It might still be worth it, though. The fund’s current annualized dividend of $2.86 per share is nearly 70% higher than the fund’s dividend five years ago, and the ETF’s stock price itself has risen more than 50%.
First Trust Preferred Securities and Income ETF
Finally, if you’ve acquired some assets with solid dividend yields and also some dividend growth potential, it’s not crazy to take on more risk in ETFs designed to offer significantly higher yields. This high-risk holding should make up the smallest portion of your dividend ETF holdings, and you still don’t want to take a lot of risk in your portfolio.A preferred stock-only fund can do this, and First Trust Preferred Securities and Income ETF (NYSE: FPE) One of the best in this breed.
If you’re not familiar, preferred stock is a mix of common stock and bonds. Most have a fixed coupon rate, although unlike bonds, dividend payments on preferred stock are not necessarily legal debt obligations. That’s why they tend to offer higher yields than traditional bonds — with more risk.However, preferred stock dividends are almost always more Compared to the dividend payments on a company’s common stock, that’s why their yields are generally higher than the stocks most of us watch on a regular basis. Disadvantages: Preferred stock offers little potential for capital appreciation, while common stock does.
In other words, preferred stocks are attractive only if you want above-average yield right now and don’t necessarily need dividend growth or capital growth.
But what a catch! The First Trust Preferred Securities and Income ETF, which currently yields a hefty 7.4% dividend, has not paid monthly since its launch in 2013.
Again, it’s not a great first or only dividend ETF. In those nine years, the payout didn’t increase much, and the ETF itself was more or less priced at the level it was when it launched. Still, in an environment where yields and interest rates on other types of assets are painfully low, owners have been collecting huge dividends.
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James Blumley has no positions in any of the stocks mentioned. The Motley Fool owns and recommends the Microsoft and Vanguard Dividend Appreciation ETFs. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.