Dividend-paying stocks are ideal for people who are retired or close to retirement. Compared to their more growth-oriented counterparts, these investments generally carry less risk due to the mature nature of their sectors. Dividend stocks offer a passive income stream that can be extremely valuable when you’ve left the workforce and also don’t have a regular salary.
However, there are also downsides to investing in it. As is the case with any purchase of individual stocks, you risk that the stocks may significantly underperform the market due to any number of unpredictable events. Any single dividend stock could also simply dampen your portfolio’s returns due to low capital appreciation or minimal annual dividend increases.
This is where exchange-traded funds (ETFs) shine. You can own a basket of dividend stocks through these funds, instantly providing diversification without sacrificing much yield. Let’s look at some great ETFs, along with some strategies for incorporating them into your retirement portfolio.
1. Vanguard High Dividend Yield ETF
THE Vanguard High Dividend Yield ETF (NYSEMKT:VYM) focuses on large, established companies that pay generous dividends. The flip side of these high payouts is that these companies are not known for particularly strong profit growth. Profits are growing about 7% per year on average, and the dividend yield is 2.8% today, about double the rate you would receive by owning the company. Vanguard S&P 500 ETF.
Retirees who purchase this ETF will generally have exposure to stocks and sectors that are not currently in trend, which is part of the reason why returns are so high. Some of its main titles are ExxonMobil, Procter & GambleAnd Walmart. Its expense ratio is extremely low at 0.05%, compared to its industry peers who charge closer to 0.25%.
2. Schwab US Dividend Stock ETF
THE Schwab US Dividend Stock ETF (NYSEMKT:SCHD) similarly focuses on high-yielding U.S. stocks, but differs from its peer Vanguard, primarily due to its focus on a few high-yielding stocks that are members of the Dow Dividend 100 Index. Its main holdings include Chevron And VerizonCommunicationsboth of which pay a yield above 4%.
This orientation means the ETF pays a higher overall yield of 3.5%. On the other hand, you’ll pay a little more to own Schwab US Dividend Equity; the spending rate is 0.06%.
As expected, this fund has underperformed the broader market over the past year during the tech rally. Shares of the ETF are up 14% over the past 12 months compared to S&P500This is a peak of 30%. Schwab US Dividend Equity will likely outperform in a market downturn, making it more of a defensive stock.
3. Vanguard Total Stock ETF
In exchange for a lower return, you can get greater diversification by holding the Vanguard Total Stock Market ETF (NYSEMKT:VTI). This fund gives you exposure to almost the entire US equity market (large, mid and small caps). You’ll immediately get a decent yield of 1.3%, which matches the yield of the more focused S&P 500.
This ETF provides investors with much greater exposure to growth stocks, as evidenced by its top holdings, which include almost all growth stocks. “The Magnificent Seven” actions. A retiree probably wouldn’t want to allocate too much of their portfolio to this fund given the emphasis on growth rather than value.
However, as part of a diversified portfolio including dividend funds, bonds and cash, Vanguard Total Stock Market can play the role of providing market-matching returns as well as (ever increasing) income.
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Demitri Kalogeropoulos has positions in Vanguard Index Funds-Vanguard Total Stock Market ETF. The Motley Fool has positions and recommends Chevron, Vanguard Index Funds-Vanguard Total Stock Market ETF, Vanguard S&P 500 ETF, Vanguard Whitehall Funds-Vanguard High Dividend Yield ETF, and Walmart. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.
3 Dividend ETFs Perfect for Retirees was originally published by The Motley Fool
