If you’re nearing or nearing retirement, and even if you’re far from retirement, consider adding a large number of dividend-paying stocks to your portfolio. You can expect healthy and growing companies that pay dividends to increase in value over time and generate regular cash for you. Their dividend payments will also increase over time.
Retirees can use that money to support themselves, and pre-retirees might just reinvest those dividends in more stocks. (Some good brokers offer to automatically reinvest your dividends for you.)
Why dividends?
Don’t underestimate the power of dividends. After all, the fact that a company has committed to paying a dividend means that it has grown to a point where management is confident that profits will support such a payout. Dividend payers also tend to perform better than non-payers.
Look at the numbers for S&P500 companies below, from a report by Hartford Funds:
|
Dividend paying status |
Average annual total return, 1973-2023 |
|---|---|
|
Dividend growers and initiators |
10.19% |
|
Dividend payers |
9.17% |
|
No change in dividend policy |
6.74% |
|
Dividend non-payers |
4.27% |
|
Dividend Reducers and Eliminators |
(0.63%) |
|
Equally weighted S&P 500 index |
7.72% |
Data source: Ned Davis Research and Hartford Funds.
How to invest in dividend payers easily
One of the best – and easiest – ways to invest in dividend-paying stocks is to do so through exchange-traded funds (ETFs). An ETF is a fund – which often tracks a specific index – that trades like a share.
Below are seven dividend-focused ETFs to consider, plus a simple S&P 500 index fund for comparison purposes — and also because it’s a damn fine ETF for anyone to consider.
|
ETF |
Recent yield |
5 years Avg. Annual return |
10 years Avg. Annual return |
|---|---|---|---|
|
iShares Preferred & Income Securities ETF (NASDAQ: PFF) |
6% |
3.29% |
4.11% |
|
Schwab US Dividend Equity ETF (NYSEMKT: SCHD) |
3.6% |
13.6% |
12.4% |
|
iShares US real estate ETF (NYSEMKT: IYR) |
2.7% |
4.2% |
6.8% |
|
Vanguard ETF with high dividend yield (NYSEMKT: VYM) |
2.7% |
11.8% |
10.9% |
|
SPDR S&P Dividend ETF (NYSEMKT: SDY) |
2.3% |
10% |
10.8% |
|
iShares Core Dividend Growth ETF (NYSEMKT: DGRO) |
2.2% |
12.8% |
12.9% |
|
Vanguard Dividend Valuation ETF (NYSEMKT: VIG) |
1.7% |
13.3% |
12.7% |
|
Vanguard S&P 500 ETF (NYSEMKT:VOO) |
1.2% |
16.4% |
14.1% |
Data source: Morningstar.com, as of October 15, 2024.
Every ETF in a nutshell
You will notice that some funds offer high dividend yields, while others have shown great long-term growth rates over the past five and ten years. When investing, there is generally a trade-off between growth and income. Here’s some more information about each of these index funds and the index that tracks each:
-
iShares Preferred & Income Securities ETF: This follows the ICE listed Preferred & Hybrid Securities Indexwhich includes a group of US dollar-denominated preferred securities, hybrid securities and convertible preferred securities. Keep in mind that preferred stocks typically don’t appreciate much in value and their dividends aren’t typically big growers either, but they do tend to offer generous payouts.
-
Schwab US Dividend Equity ETF: This ETF tracks the Dow Jones US Dividend 100 Index of high dividend yield US stocks that have consistently paid dividends. The ETF’s biggest holdings were recently Home Depot, BlackRockAnd Cisco systems.
-
iShares US real estate ETF: This ETF tracks the Dow Jones US Real Estate Capped Index and includes many real estate investment trusts (REITs) – companies that own many properties and generate income by renting them out. This ETF’s top holdings have recently been listed Prologis, American towerAnd Equinix. They specialize in warehouses, telecommunications towers and digital infrastructure, respectively.
-
Vanguard ETF with high dividend yield: This ETF tracks the FTSE High Dividend Yield Index and focuses on domestic equities with high dividend yields (excluding REITs). Including recent top positions Broadcom, JPMorgan ChaseAnd ExxonMobil.
-
SPDR S&P Dividend ETF: This ETF tracks the S&P High Yield Dividend Aristocrats Indexwhich includes companies that have paid dividends for at least twenty years and that meet certain criteria related to liquidity and size. (The term Dividend Aristocrats® is a registered trademark of Standard & Poor’s Financial Services LLC.) His top rankings were recently recorded Real estate income, KenvueAnd IBM.
-
iShares Core Dividend Growth ETF: This ETF tracks an index of U.S. stocks with a history of consistently growing dividends. The company’s major holdings recently included ExxonMobil, AppleAnd Microsoft.
-
Vanguard Dividend Valuation ETF: This ETF tracks the S&P American Dividend Growers Indexwith companies increasing their payouts for at least ten consecutive years. The most important positions recently were Microsoft, Apple and Broadcom.
-
Vanguard S&P 500 ETF: This ETF, which tracks the S&P 500, is here for comparison purposes. This too has a dividend yield, but also includes many non-dividend payers. Although the dividend yield is not very high, the fund compensates for this with a solid track record of growth. (Note that despite the returns in the table above, the stock market’s long-term average annual gain is closer to 10% than 16%.)
So consider one or more of these ETFs for your long-term portfolio, whether you’re nearing retirement or have decades to go before retirement.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Selena Maranjian has positions in American Tower, Apple, Broadcom, Microsoft, Realty Income and Schwab US Dividend Equity ETF. The Motley Fool holds and recommends American Tower, Apple, Cisco Systems, Equinix, Home Depot, JPMorgan Chase, Kenvue, Microsoft, Prologis, Realty Income, Vanguard Dividend Appreciation ETF, Vanguard S&P 500 ETF, and Vanguard Whitehall Funds-Vanguard High Dividend Yield ETF. The Motley Fool recommends Broadcom and International Business Machines and recommends the following options: Long January 2026 $13 calls on Kenvue, Long January 2026 $180 calls on American Tower, Long January 2026 $395 calls on Microsoft, Long January 2026 $90 calls on Prologis, short January In 2026 $185 rings on American Tower, and in January 2026 rings $405 on Microsoft. The Motley Fool has a disclosure policy.
These 8 Index ETFs Are a Retiree’s Best Friend was originally published by The Motley Fool
