Those of us nearing retirement or entering it are probably thinking more about income than ever. Social Security is great, but in June the average monthly pension benefit was just $1,918 — about $23,000 for the year. Even if you get twice that amount, it’s probably a lot less than you’d like as your total retirement income, so you should work on building a solid nest egg for retirement and thinking about how you can set up multiple income streams for your later years.
An excellent source of retirement income is dividends.
Why dividends?
Dividends are great for several reasons. For example:
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Healthy, growing dividend-paying stocks will increase their payouts over time. So if one pays you $1.50 per share today, it could earn you $4.00 per share in 15 years.
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Healthy and growing dividend-paying companies are likely to have stock prices that rise significantly over time, rewarding shareholders through share price growth, dividend income, And dividend growth.
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Allocating a significant portion of your portfolio to dividend payers can generate more income than you might imagine. For example, if you have $400,000 in such companies with an average dividend yield of 3%, you’re looking at $12,000 in annual income — an average of about $1,000 per month.
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Not only do you get to enjoy a significant dividend income, but you don’t have to sell any of your portfolio to receive it. Your portfolio simply continues to receive cash injections.
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Retirees can use that money for living expenses. If the dividends are in a pre-retirement portfolio, those dividends can be reinvested in additional stocks, which then provide their own dividend payments.
Are you starting to get dizzy from the power of dividends? Great! Here’s another tidbit to digest: Dividend-paying companies aren’t weak compromises that you could invest in instead of growth stocks. In fact, they tend to perform well!
Check out the table below, based on a report from Hartford Funds:
|
Dividend paying status |
Average annual total return, 1973-2022 |
|---|---|
|
Dividend growers and initiators |
10.24% |
|
Dividend payers |
9.18% |
|
No change in dividend policy |
6.60% |
|
Dividend non-payers |
(0.60%) |
|
Dividend reducers and eliminators |
3.95% |
Data source: Ned Davis Research and Hartford Funds.
Dividend-focused ETFs are great investments for your retirement
Now that you’re excited about dividend-paying stocks, should you buy some soon? Well, sure. If you like studying and picking individual stocks, go ahead. But if you don’t, and even if you do, could bethen consider choosing exchange-traded funds (ETFs) — instead of or in addition to individual stocks.
Below are nine ETFs that offer income. The first eight focus on income, while the last is a simple S&P 500 index fund. It’s there for comparison purposes — and also because it’s a darn good ETF for anyone to consider.
|
ETF |
Recent Yield |
Average annual return over 5 years |
Average annual return over 10 years |
|---|---|---|---|
|
iShares Preferred & Income Securities ETF (NASDAQ: PFF) |
6.36% |
2.29% |
3.44% |
|
SPDR Portfolio S&P 500 High Dividend ETF (NYSEMKT: SPYD) |
4.39% |
7.59% |
n/a |
|
Schwab US Dividend Equity ETF (NYSEMKT: SCHD) |
3.72% |
12.48% |
11.52% |
|
iShares US Real Estate ETF (NYSEEMKT: IYR) |
3.12% |
3.89% |
6.06% |
|
Vanguard High Dividend Yield ETF (NYSEMKT: VYM) |
2.85% |
10.24% |
9.78% |
|
SPDR S&P Dividend ETF (NYSEMKT: SDY) |
2.41% |
8.55% |
9.85% |
|
iShares Core Dividend Growth ETF (NYSE: DGRO) |
2.38% |
11.58% |
11.83% |
|
Vanguard Dividend Appreciation ETF (NYSEMKT: VIG) |
1.76% |
11.63% |
11.56% |
|
Vanguard S&P 500 ETF (NYSEMKT: VOO) |
1.27% |
14.34% |
12.71% |
Source: Morningstar.com, as of July 31, 2024.
The funds are ranked by dividend yield, and you may want to invest in the one with the highest yield, but hold on. You’ll see in the table that the ETFs with higher yields tend to grow a little slower than the ETFs with slightly lower yields. So keep that in mind. You may want to spread your dollars across multiple ETFs.
Also note that the above numbers are not the only ones you are looking at. Read up on each interesting fund. For example, you want to know how much each fund charges annually (the “cost ratio”) and how many different securities it holds:
|
ETF |
Cost ratio |
Recent number of holdings |
|---|---|---|
|
iShares Preferred & Income Securities ETF |
0.46% |
439 |
|
SPDR S&P Dividend ETF |
0.35% |
136 |
|
iShares US Real Estate ETF |
0.40% |
75 |
|
Vanguard Dividend Appreciation ETF |
0.06% |
342 |
|
SPDR Portfolio S&P 500 High Dividend ETF |
0.07% |
78 |
|
Schwab US Dividend Equity ETF |
0.06% |
103 |
|
Vanguard High Dividend Yield ETF |
0.06% |
556 |
|
iShares Core Dividend Growth ETF |
0.08% |
416 |
|
Vanguard S&P 500 ETF |
0.03% |
504 |
Here’s what the expense ratio tells you: For example, if it’s 0.03%, you’ll pay about $3 a year on a $10,000 investment. If it’s 0.46%, you’ll pay $46. Generally speaking, the lower the fee, the better, although of course some funds are worth their higher fees.
The number of holdings may be important to you if you want to spread your money across different investments. a lot of of holdings or relatively little. Remember, however, that how a fund weights its holdings matters a lot. It is common for a fund to be market-capitalization weighted, so that the largest companies in it are the most influential. Conversely, that means that smaller companies will not change much.
Therefore, seriously consider dividend-focused ETFs for your portfolio. You can choose one or more of the above options, but know that there are other good options as well.
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Selena Maranjian has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF, Vanguard Specialized Funds-Vanguard Dividend Appreciation ETF, and Vanguard Whitehall Funds-Vanguard High Dividend Yield ETF. The Motley Fool has a disclosure policy.
These 9 Dividend ETFs Are a Retiree’s Best Friend was originally published by The Motley Fool
