No two investors are ever exactly the same. However, there are some sweeping generalizations about investors as a whole that can be reasonably safely made. One of the obvious ones is that people with many working years ahead of them should largely invest in growth, while retired investors should focus on generating reliable income from their savings.
With that as background, here’s a closer look at three dividend-focused exchange traded funds (ETFs) that people near or nearing retirement should consider owning. While all would fit into most retirement portfolios, all three together would make a very well-rounded income-generating engine.
Vanguard Dividend Appreciation ETF
It’s easy to get so enamored with high dividend yields that you forget about dividend growth and capital growth. However, it is just as easy to fall into the opposite trap. That is, your hunt for reliable dividend growth can easily distract you from thinking that interest rates are strangely low compared to alternatives or that there is little hope for meaningful capital growth.
The Vanguard Dividend Appreciation ETF (NYSEMKT: VIG) offers a tasty balance of all of this dynamic.
As the name suggests, the primary goal of the Vanguard Dividend Appreciation fund is to achieve sustainable growth in dividend payments over time. And it has done just that. The total payout per share of $3.21 last year is more than double the $1.39 payout in 2013. Credit Standard & Poor’s requirements for inclusion in the underlying S&P American dividend growers table of contents. S&P considers only companies (of all market caps) that have increased their annual dividend payments for at least ten consecutive years, and then throws out the highest-yielding 25% of these names on the assumption that these high yields indicate potential challenges ahead. their continued growth in dividend payments.
Experienced investors will probably know that inclusion in the list of so-called Dividend Aristocrats®* is a little more difficult. These names must have delivered and are limited to no less than 25 consecutive years of annual dividend growth S&P500 shares. Given this more selective requirement, why wouldn’t a retiree choose the same? ProShares S&P 500 Dividend Aristocrats ETF (NYSEMKT: NOBL) instead – especially considering the higher yield of 2.3% versus the Vanguard ETF’s current yield of just 1.8%?
There is certainly nothing wrong with the alternative. But there’s one overarching reason why VIG might make more sense for certain retirees. That is, with holding companies like Microsoft, VisaAnd Breedcom in its pool, the Vanguard Dividend Appreciation ETF offers more total upside potential without any less net dividend growth potential. In the meantime, it’s just a little more volatile.
* Dividend Aristocrats® is a registered trademark of Standard & Poor’s Financial Services LLC.
Schwab US Dividend Equity ETF
That said, retirees certainly don’t want to put themselves in the position of not collecting enough income to pay all of their bills now. Schwab US Dividend Equity ETF (NYSEMKT: SCHD) is a smart addition to a position in the Vanguard Dividend Appreciation fund, while the trailing dividend yield is 3.4%.
This Schwab ETF is intended to provide the Dow Jones US Dividend 100 index – a basket of the 100 highest-yielding 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 ten years of consecutive annual dividend increases. OnHowever, like the S&P US Dividend Growers Index, all of these tickers are eligible to be included in this index regardless of their yield. There is even a specific preference for higher dividend yields.
While the descriptions of the two ETFs are seemingly similar, there is actually quite a contrast here. The Schwab fund’s top holdings currently include names like DIY store, Amgen, Coca-ColaAnd Chevron.
You probably won’t see as much dividend growth with the Schwab US Dividend Equity ETF as you would with the aforementioned Vanguard Dividend Appreciation, and you probably won’t experience as much price appreciation either. However, you’ll start with above-average returns and chances are you’ll see less volatility. At least that counts for a little.
VanEck BDC Income ETF
Last but not least, income-oriented retirees may want to consider the VanEck BDC Income ETF (NYSEMKT: BIZD) to their pension portfolios.
It’s notably different from the Schwab fund or the Vanguard fund, both of which hold only stocks. The VanEck BDC Income ETF holds only shares in business development companies (or BDCs), giving investors easy access to an income-focused part of the market that remains largely hidden.
Business development companies are exactly what they sound like: they develop businesses. More specifically, they provide financing for emerging companies that may not want to tap into public markets, but also can’t qualify for a conventional bank loan. This money can be offered in exchange for equity in the borrower’s organization. However, it’s usually provided in the form of a high-interest loan, which reflects the above-average risk these loans pose to the lender. That’s why the VanEck fund’s trailing yield is a frothy 10.1%—that’s the kind of yield this ETF’s holdings are currently seeing.
There are trade-offs to owning this high-yield investment. One is the limited opportunity for meaningful capital growth. While there are someThe loans of this fund for business development companies should be viewed as bonds, which are simply interest-bearing instruments that repay your initial capital once the original terms of the loan have been repaid. Another consideration is the surprising amount of volatility this ETF can dish out, given the underlying nature of the business.
The VanEck BDC Income ETF’s most important feature, however, makes it worth it for most retirees. That’s a large (and surprisingly reliable) dividend that supports a yield that consistently exceeds prevailing interest rates at any given time. If nothing else, you’re guaranteed to stay ahead of inflation with this fund.
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 holds positions in 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 Motley Fool has a disclosure policy.
These 3 Dividend ETFs Are a Retiree’s Best Friend, originally published by The Motley Fool
