One of the trickier tasks for retired investors is ensuring a safe perpetual withdrawal rate from their nest eggs. That is, the retiree must be able to not only draw on a steady stream of income that funds their living expenses, but also ensure that the portfolio is not depleted before they die.
As with most things in investing, diversifying the sources of income that fund portfolio withdrawals can help. For example, retirees can mix and match income-producing assets like preferred shares, real estate investment trusts and bonds.
Another possibility is investing in dividend-paying stocks, which can offer the potential for capital appreciation in addition to steady income.
“While there is a temptation to move to ultraconservative assets in retirement, this comes with its own risks,” says Curtis Congdon, president at XML Financial Group. “Dividend-paying stocks offer a fairly predictable income stream and can add a differentiated source of return to a portfolio of bonds.”
While dividend stocks are more volatile than bonds, their long-term returns are generally expected to be higher, which can improve a portfolio’s withdrawal and survival rates — especially as life spans increase.
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“Demographic research illustrates how people are living longer, which means that they need to make those retirement assets stretch further,” says Christopher Huemmer, senior investment strategist for FlexShares Exchange-Traded Funds at Northern Trust Asset Management. “This is especially crucial in the current environment where inflation can erode the value of your nest egg and impair your purchasing power, and historically, common stocks have served as a long-term inflation hedge.”
However, selecting the right dividend stocks runs the same risks of regular stock picking, such as under-diversification, higher volatility and the risk of a complete wipeout, as recently happened to shareholders in First Republic Bank.
“Individual companies can cut or suspend their dividends for a variety of reasons, such as declining earnings, increased debt or changes in business strategy,” says Wes Moss, managing partner and chief investment strategist at Capital Investment Advisors. “If a company cuts its dividend, it can negatively impact the value of your investment and reduce your income.”
Therefore, a more diversified alternative may be buying an exchange-traded fund, or ETF, that holds a broad basket of dividend stocks.
“By investing in dividend ETFs, you get that exposure to multiple companies across many different sectors all within a single investment,” Moss says. “Many ETFs that focus on dividend stocks may have anywhere from 100 to 500 holdings, which provides significant protection from single-stock risk.”
Here’s a look at seven of the best dividend ETFs for retirees on the market right now:
| Dividend ETF | 30-Day SEC Yield |
| Franklin U.S. Low Volatility High Dividend Index ETF (ticker: LVHD) | 3.9% |
| FlexShares Quality Dividend Index Fund (QDF) | 2.5% |
| Schwab U.S. Dividend Equity ETF (SCHD) | 3.7% |
| iShares Core Dividend Growth ETF (DGRO) | 2.5% |
| Amplify CWP Enhanced Dividend Income ETF (DIVO) | 2.1% |
| JPMorgan Equity Premium Income ETF (JEPI) | 9.8% |
| ProShares S&P 500 Dividend Aristocrats ETF (NOBL) | 2.1% |
Franklin U.S. Low Volatility High Dividend Index ETF (LVHD)
“Retirement investors may consider reducing exposure to riskier assets while increasing exposure to more defensive equities with lower volatility and higher potential dividends,” says Michael LaBella, senior vice president and head of sustainable portfolio solutions at Franklin Templeton.
An ETF that screens for both considerations is LVHD, which currently sports a four-star Morningstar rating.
LVHD tracks the QS Low Volatility High Dividend Index, which screens 3,000 of the largest stocks tracked by the Solactive U.S. Broad Market Index for characteristics like high sustainable dividend yields, profitability, and price and earnings volatility. The ETF also reduces concentration risk by capping individual stocks at 2.5% and sector weights at 25%. LVHD charges a 0.27% expense ratio, or $27 a year for a $10,000 investment.
FlexShares Quality Dividend Index Fund (QDF)
“We find that focusing on the financial health, or quality, of the company gives investors confidence that a dividend is well covered and the company has the ability to increase that dividend over time,” Huemmer says. “The quality factor can help assess the sustainability of future payouts by targeting companies with strong profitability and consistent, robust levels of cash flows.”
This is the approach used by QDF, which tracks the Northern Trust Quality Dividend Index. The top holdings in this ETF span a plethora of high-quality, large-cap and blue-chip U.S. dividend payers such as Apple Inc. (AAPL), Microsoft Corp. (MSFT), Procter & Gamble Co. (PG) and Johnson & Johnson (JNJ). QDF ETF currently charges a 0.37% expense ratio.
Schwab U.S. Dividend Equity ETF (SCHD)
Another great example of an ETF that screens for quality is SCHD, which tracks the Dow Jones U.S. Dividend 100 Index for a relatively low 0.06% expense ratio. With top holdings like PepsiCo Inc. (PEP), Coca-Cola Co. (KO), Verizon Communications Inc. (VZ) and Merck & Co. Inc. (MRK), SCHD contains some of the most popular and long-standing dividend stocks on the market.
SCHD’s index screens U.S. dividend stocks not only for a record of consistently paying dividends, but also checks them for fundamental strength relative to sector peers. This is done by assessing a prospective holding’s free cash flow to total debt, return on equity and five-year dividend growth rate. The 100 stocks that score the highest on a composite of these metrics are included in SCHD’s portfolio.
[SEE: 7 High-Yield ETFs for Income Investors]
iShares Core Dividend Growth ETF (DGRO)
“Concentration risk can sneak up on retirees when they don’t realize that many of the dividend stocks they own operate in the same industry,” Congdon says. “For example, many higher-yielding stocks come from the real estate or energy industries.”
An ETF that avoids this is DGRO, which is fairly evenly distributed between health care, financials, technology and consumer staples while excluding real estate.
DGRO tracks the Morningstar US Dividend Growth Index, which holds U.S. stocks with a history of uninterrupted dividend growth spanning at least five consecutive years. The ETF also screens for positive consensus earnings forecasts and a payout ratio of less than 75%, both of which can help ensure quality. As an iShares “core” ETF, DGRO charges a relatively low 0.08% expense ratio.
Amplify CWP Enhanced Dividend Income ETF (DIVO)
Retirees who don’t mind the use of active management and derivatives when it comes to an ETF may like DIVO, which has a five-star rating from Morningstar. This ETF starts by actively selecting a concentrated portfolio of 20 to 25 U.S large-cap stocks based on Amplify’s assessment of metrics like historical earnings and dividend growth, management track record, cash-flow growth and return on equity.
To enhance income potential, DIVO is able to tactically sell covered calls on individual stocks within its portfolio as Amplify sees fit. This is an options strategy that basically converts a portion or all of a stock’s future upside potential into an immediate cash premium, which is paid out as income. DIVO’s stated goal is to lower volatility while maintaining income potential. The ETF charges a 0.55% expense ratio.
JPMorgan Equity Premium Income ETF (JEPI)
Another highly popular, actively managed dividend ETF that makes use of derivatives is JEPI. As a result of investors seeking defensive income options throughout 2022’s bear market, JEPI has swelled to over $25 billion in assets under management. Like DIVO, JEPI combines actively managed stock selection with a covered call overlay provided by its use of equity-linked notes, or ELNs.
Unlike the previous dividend ETFs that tracked indexes, JEPI’s stock selection criteria are a black box, using JPMorgan’s proprietary models to value, select and rank potential picks. While its holdings are still transparent and updated daily like most ETFs, retirees will have to place a greater deal of trust in JPMorgan’s stock-picking abilities as there is no index methodology to examine.
ProShares S&P 500 Dividend Aristocrats ETF (NOBL)
“When it comes to managing risk, retirees should focus on those dividend payers that have a proven ability to maintain and grow that dividend over time,” Huemmer says. “Too often, retirees prioritize chasing high yields, and fail to realize that it is often the result of a falling stock price along with signs that the current dividend is not sustainable.”
An ETF that avoids this pitfall is NOBL.
NOBL tracks the S&P 500 Dividend Aristocrats Index. This index tracks 66 companies selected from the broader S&P 500 index that have paid and grown dividends consecutively for at least 25 years. This characteristic helps screen for companies with stable earnings, robust profitability and a track record of growth. The ETF charges a 0.35% expense ratio.
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7 Dividend ETFs for Retirement Investors originally appeared on usnews.com
Update 05/08/23: This story was previously published at an earlier date and has been updated with new information.
