If you’re mostly done working for a living and are now looking for your nest egg to provide the cash to cover your expenses, a diversified portfolio of dividend-paying stocks could do the job. However, there may be a simpler, safer solution: dividend-focused exchange-traded funds (ETFs). Besides the fact that they can quickly give you more diversification than you could normally achieve by choosing stocks on your own, owning these funds also allows you to focus on enjoying your golden years without constantly watching your portfolio. need to keep.
Here are three great dividend ETFs that current and future retirees should consider.
iShares Select Dividend ETF
Not that you should – or should – limit yourself to a single dividend-oriented exchange-traded fund, but if you only want to own one, iShares Select Dividend ETF (NASDAQ: DVY) is the gene.
Built to mirror the Dow Jones US Select Dividend Index, the ETF contains approximately 100 hand-picked, higher-yielding US stocks, each of which has at least a five-year history of paying dividends. However, most of its holdings have a much longer track record than that. Some of the largest positions include: Other† Valero Energyand IBM, and they are particularly among the larger companies because they generate above-average returns. Collectively, the fund’s current dividend yield is close to 3.2%.
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The utilities sector is the largest in the fund, accounting for about a quarter of its assets. Most other sectors account for segments of 12% or less, so the risks are fairly well spread. And utility players are arguably some of the world’s most trusted dividend payers, as people understandably give high priority to keeping the lights on and the water on.
While the iShares Select Dividend ETF is a great all-round choice, like any other investment, it comes with a trade-off: While you can benefit from healthy returns now, you won’t necessarily see inflation-increasing payout growth. That may not be a problem for you, but if it is, there is a solution.
Vanguard Dividend Appreciation ETF
That solution is to also invest in the Vanguard Dividend Appreciation ETF (NYSEMKT: VIG)† As the name suggests, the wallet is specifically designed to provide reliable payout growth over time.
The fund’s stock selection strategy is simple enough: it replicates the S&P US Dividend Growers Index, which includes only US stocks with at least a 10-year track record of annual dividend increases. That group contains names like Johnson & Johnson and Microsoft†
However, the index also excludes the 25% of the highest-yielding tickers that would otherwise qualify for inclusion. The index managers’ assumption is that if a stock’s returns are that high, it ends up carrying too much risk – the other 75% will do just fine. The end result is a lot of price stability, which is what most retirees want. The beta of this fund is only 0.84 meaning it only moves (on average) about 84% all the way to the S&P 500 does on any given day.
The trade-off with this ETF is its relatively low yield – currently around 1.8%. So if you open a position, you won’t bring in a lot of money in the beginning. However, it can still be worth it. The fund’s current annual payout per share of $2.86 is nearly 70% more than the fund’s dividend from five years ago, while shares of the ETF itself are up more than 50%.
First Trust Preferred Securities and Income ETF
Finally, if you’ve already secured some assets with reliable dividend yields and also addressed some dividend growth potential, it wouldn’t be a bad idea to take a little more risk in an ETF designed to deliver significantly higher returns. This higher-risk investment should make up the smallest portion of your dividend ETF investments, and you still don’t want to risk a large portion of your portfolio. A fund holding nothing but preferred stock could do the trick, and the First Trust Preferred Securities and Income ETF (NYSEMKT: FPE) is one of the best of this breed.
If you are unfamiliar, a preferred stock is something of a hybrid of a common stock and a bond. Most have a fixed coupon rate, although, unlike bonds, the dividend payments of preferred stocks are not necessarily statutory debt obligations. That’s why they typically offer higher returns than traditional bonds — there’s a little more risk. Yet preferred stock dividends are almost always Lake guaranteed than dividend payments on common stock of companies, which is why their returns tend to be higher than the stock tickers most of us look at on a regular basis. The downside: Preferred stock rarely offers the potential for much capital appreciation, while common stock does.
In other words, preferred stocks are only attractive if you now want above-average returns and don’t necessarily need dividend or capital appreciation.
But what does it do! The current dividend yield of the First Trust Preferred Securities and Income ETF is an impressive 7.4%, and the fund has not failed to make some sort of monthly payment since 2013 when it launched.
Again, it’s not a great first or only dividend ETF. The payout hasn’t risen much in that nine-year period, and the ETF itself is priced more or less where it was when it launched. However, owners have been receiving great dividends all along, in an environment where yields and interest rates on other types of businesses have been excruciatingly low.
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James Brumley has no position in any of the listed stocks. The Motley Fool holds positions in and recommends Microsoft and Vanguard Dividend Appreciation ETF. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.