These seven ETFs are ideal for retirement investors.
Younger investors may target overall portfolio growth, but investors in their golden years have a very different set of objectives. For retirees, ensuring preservation of capital is a high priority. A sudden decline in portfolio value can severely jeopardize retirement plans. Retirees must also ensure that the portfolio generates sufficient income to meet their living expenses. While selling shares to fund withdrawals is possible, doing so can be psychologically difficult, especially during a market downturn. Thus, an alternative is to fund retirement income streams via high-dividend-paying exchange-traded funds, or ETFs. Compared to individual dividend stocks, dividend ETFs offer greater diversification. These ETFs can supplement or replace the usual equity allocation in a retiree’s portfolio. Here are the seven best dividend ETFs to buy for retirement investors.
Vanguard High Dividend Yield ETF (ticker: VYM)
A popular dividend ETF among passive investors is VYM. This ETF tracks the FTSE High Dividend Yield Index, which holds a portfolio of 442 U.S. large-cap stocks forecasted to have above-average dividend yields. Within equities, VYM falls into the large-cap value bucket. Compared to the total U.S. stock market, VYM is overweight in sectors such as energy, health care and consumer staples, with notable top holdings including Exxon Mobil Corp. (XOM), Chevron Corp. (CVX), Procter & Gamble Co. (PG) and Johnson & Johnson (JNJ). Like many of Vanguard’s ETFs, VYM charges a low expense ratio of 0.06%. The ETF currently pays a 30-day SEC yield of 3%.
Schwab U.S. Dividend Equity ETF (SCHD)
There’s more than one way to select dividend ETFs. While some dividend ETFs like VYM screen for high yields, others screen for different factors. A great example is SCHD, which tracks the Dow Jones U.S. Dividend 100 Index. This ETF holds a total of 103 U.S. stocks that possess quality fundamentals and an established history of dividend payments. Top holdings include Verizon Communications Inc. (VZ), Broadcom Inc. (AVGO), Merck & Co. Inc. (MRK), Pfizer Inc. (PFE) and Home Depot Inc. (HD). With distributions reinvested, SCHD only lost 3.3% in 2022 due to the robust nature of its holdings. The ETF pays a 30-day SEC yield of 3.3% and charges a 0.06% expense ratio.
Invesco S&P 500 High Dividend Low Volatility ETF (SPHD)
A great way to get even more defensive with a dividend ETF is to also implement a low-volatility screen. This approach selects stocks with historically lower-than-average standard deviation and beta, which measures volatility and sensitivity to the overall market’s gyrations. To implement this strategy, investors can buy SPHD. Most of this ETF is composed of defensive stocks from the consumer staples, utilities and health care sectors. Notable holdings include Kinder Morgan Inc. (KMI), Altria Group Inc. (MO) and Gilead Sciences Inc. (GILD). SPHD costs an expense ratio of 0.3% and pays a 30-day SEC yield of 4.3%.
iShares International Select Dividend ETF (IDV)
Retirees generally favor U.S. dividend stocks for better tax efficiency, but international dividend stocks should not be discounted. For one, these stocks can offer enticingly high yields without incurring significantly more risk. In addition, holding these stocks can hedge against the possibility of the U.S. market stagnating, as it did between 2000 and 2009. A great way to buy high-quality dividend stocks from developed markets such as Canada, the U.K., France, Japan and Australia is via IDV. This ETF tracks the Dow Jones EPAC Select Dividend Index, which holds 102 international dividend stocks such as British American Tobacco PLC (BATS), Canadian Utilities Ltd. (CU) and the Bank of Nova Scotia (BNS). IDV currently pays a high 30-day SEC yield of 7.1% and charges a 0.49% expense ratio.
Global X Nasdaq 100 Covered Call ETF (QYLD)
Options strategies are often used to transform the risk-return profile of an investment into something else entirely. QYLD is a great example. This ETF deploys at-the-money covered call options to turn the tech-heavy, low-dividend Nasdaq-100 index into an income juggernaut. By selling covered calls, QYLD essentially converts the Nasdaq-100’s potential upside into immediate income. While it will lag during a bull market, QYLD can outperform in sideways markets and even cushion losses slightly during a bear market. Thanks to the high volatility of the Nasdaq-100, QYLD’s options premiums run high. The ETF has consistently made monthly distributions for eight years running. QYLD currently pays a 12-month trailing yield of 14.4% and costs a 0.6% expense ratio.
JPMorgan Equity Premium Income ETF (JEPI)
Investors willing to consider actively managed strategies might prefer JEPI, which selects stocks for defensive characteristics and deploys an options overlay to enhance income. First, fund managers start by conducting bottom-up fundamental analysis to select stocks, which currently include names such as Abbvie Inc. (ABBV), Exxon Mobil, Coca-Cola Co. (KO) and Mastercard Inc. (MA). Then, the ETF sells out-of-the-money call options on the S&P 500 to generate monthly income. JEPI pays a 30-day SEC yield of 11.8%. The ETF also proved resilient during 2022, losing just 4.5% with distributions reinvested, while the S&P 500 fell by 19.4%. JEPI costs an expense ratio of 0.35%.
Nationwide Nasdaq-100 Risk-Managed Income ETF (NUSI)
Balanced portfolios of stocks and bonds suffered nearly as much as 100% stock portfolios throughout 2022 as interest rates rose steadily. As a result, some retirees are choosing other strategies for portfolio protection. A great alternative to bonds is an options collar ETF like NUSI, which targets high monthly income and downside protection. The ETF starts by selling an out-of-the-money Nasdaq-100 call option for a cash premium. NUSI then uses a portion of this premium to purchase an out-of-the-money Nasdaq-100 put option, which provides crash protection. The remaining premium is paid out as monthly income. NUSI worked very well during the March 2020 COVID-19 crash, thanks to its options collar strategy. The ETF charges a 0.68% expense ratio and has a 12-month trailing yield of 10%.
7 best dividend ETFs to buy for retirement investors:
— Vanguard High Dividend Yield ETF (VYM)
— Schwab U.S. Dividend Equity ETF (SCHD)
— Invesco S&P 500 High Dividend Low Volatility ETF (SPHD)
— iShares International Select Dividend ETF (IDV)
— Global X Nasdaq 100 Covered Call ETF (QYLD)
— JPMorgan Equity Premium Income ETF (JEPI)
— Nationwide Nasdaq-100 Risk-Managed Income ETF (NUSI)
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7 Dividend ETFs for Retirement Investors originally appeared on usnews.com
Update 01/10/23: This story was previously published at an earlier date and has been updated with new information.
