No two investors are exactly alike. There are, however, a few sweeping generalizations that are reasonably reasonable to make about investors as a whole. One of the most obvious is that people with many years of work ahead of them should invest largely in growth, while retired investors should focus on generating reliable income from their savings.
With that backdrop, here’s a closer look at three dividend-focused exchange-traded funds (ETFs) that people in or near retirement should consider owning. While any one would fit into most retirement portfolios, all three together would make a very comprehensive income-producing engine.
Vanguard Dividend Appreciation ETF
It’s easy to get so seduced by high dividend yields that you forget about dividend growth and capital appreciation. However, it’s just as easy to fall into the opposite trap. Indeed, your quest for reliable dividend growth can easily blind you to the fact that a yield is suspiciously low relative to alternatives or that there’s little hope for meaningful capital appreciation.
THE Vanguard Dividend Appreciation ETF (NYSEMKT:VIG) offers a tasty balance of all of these dynamics.
As the name suggests, the primary goal of the Vanguard Dividend Appreciation fund is to generate sustained dividend growth over time. And that’s exactly what he did. The total payout per share of $3.21 last year is more than twice as high as $1.39 in 2013. Credit Standard & Poor’s requirements for inclusion in the underlying fund US S&P Dividend Producers index. S&P only considers companies (of all market capitalizations) that have increased their annual dividend payments for at least 10 consecutive years, then reject the top 25% of those stocks, on the assumption that these high yields portend potential challenges to continued growth in their dividend payments.
Seasoned investors will likely know that inclusion in the so-called Dividend Aristocrats®* list is slightly more difficult. These names must have produced at least 25 consecutive years of annual dividend growth and are also limited to S&P 500 actions. Given this more demanding requirement, why would a retiree not opt ​​for the same ProShares S&P 500 Dividend Aristocrats ETF (NYSEMKT: NOBL) instead – especially given its higher yield of 2.3% compared to the Vanguard ETF’s current yield of just 1.8%?
There is certainly nothing wrong with this alternative. But there’s a fundamental reason why VIG might make more sense for some retirees. That is to say, with assets like Microsoft, VisaAnd Broadcom in its pool, the Vanguard Dividend Appreciation ETF offers more total upside potential without less potential for net dividend growth. It’s just a little more volatile in the meantime.
* Dividend Aristocrats® is a registered trademark of Standard & Poor’s Financial Services LLC.
Schwab US Dividend Stock ETF
That being said, retirees certainly don’t want to find themselves in the situation of not having enough income to pay all their bills right now. Schwab U.S. Dividend Stock ETF (NYSEMKT:SCHD) is a wise complement to a position in the Vanguard Dividend Appreciation fund, while its current dividend yield stands at 3.4%.
This Schwab ETF is intended to reflect the Dow Jones US Dividend 100 index – a basket of the 100 best-performing 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 10 years of uninterrupted annual dividend increases. AndHowever, like the S&P US Dividend Growers Index, all of these stocks are eligible to be included in this index regardless of their yield. In fact, there is a specific preference for higher dividend yields.
Although the descriptions of the two ETFs are seemingly similar, there is actually some contrast here. The Schwab fund’s top holdings currently include names like Home deposit, Amgen, Coca-ColaAnd Chevron.
You probably won’t see as much dividend growth of the Schwab US Dividend Equity ETF as you would the aforementioned Vanguard Dividend Appreciation, and you probably won’t see as much price appreciation either. However, you’re starting with an above-average yield and you’ll probably see less volatility. That counts for something, at least.
VanEck BDC Income ETF
Last but not least, income-conscious retirees might consider adding the VanEck BDC Income ETF (NYSEMKT: US) to their retirement portfolios.
That’s a marked departure from the Schwab fund or the Vanguard fund, both of which hold only stocks. The VanEck BDC Income ETF holds only shares of business development companies (or BDCs), giving investors simple exposure to a slice of the income-focused market that remains largely obscured.
Business development companies are precisely what they claim to be: they develop companies. More specifically, they finance emerging companies that may not want to go public, but also don’t qualify for a conventional bank loan. This money can be offered in exchange for equity in the borrower’s organization. More often, however, it’s offered in the form of a high-interest loan, reflecting the higher-than-average risk that these loans pose to the lender. That’s why the VanEck fund’s current yield is 10.1%—that’s the kind of yield this ETF’s holdings are currently sporting.
There are trade-offs to holding this high-yielding investment. One is the limited likelihood of significant capital appreciation. While there are a fewThe business development company loans in this fund should be considered bonds, which are just interest-bearing instruments that return your original capital to you once the original loan terms are repaid. Another downside is the surprising volatility this ETF can generate, given the underlying nature of the business.
However, the key attribute of the VanEck BDC Income ETF makes it worth it for most retirees. It’s a large (and surprisingly reliable) dividend that supports a yield that’s consistently higher than prevailing interest rates at any given time. At the very least, you’re guaranteed to stay ahead of inflation with this fund.
Just 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 has 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 call on Microsoft and short January 2026 $405 call on Microsoft. The Motley Fool has a position in the stocks mentioned above 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 call on Microsoft and short January 2026 $405 call on Microsoft. disclosure policy.
These 3 Dividend ETFs Are Retirees’ Best Friends was originally published by The Motley Fool
