AAre you a retiree looking for investment income? Or is that period of your life fast approaching? Do not worry. Moving from a growth-focused portfolio to a more secure income-focused portfolio doesn’t have to be a difficult transition.
Indeed, if you want, you can do it entirely with exchange-traded funds (ETFs). In fact, you should probably make it a point to do so, because as a retiree you should seek as much security and stability as possible without cutting corners on your total returns. Here are three dividend-paying ETFs to help you start your search.
SPDR S&P Dividend ETF
It’s an obvious choice almost to the point of being a cliché, but most fundamental holdings in any portfolio are the most obvious. To that end, consider starting your transition to more income-producing assets with SPDR S&P Dividend ETF (NYSEMKT:SDY).
As its name suggests, the SPDR S&P Dividend ETF is designed from the ground up to pay dividends. It is designed to reflect the performance of the S&P High Yield Dividend Aristocrats, which are the best of the best dividend payers in the market. Dividend aristocrats are large-cap companies that have increased their payouts for at least 25 consecutive years, and the result of limiting index and fund holdings to “high-yielding” names is clear.
Be sure to keep your expectations in check. These stocks may be the most productive names among Dividend Aristocrats, but overall, Dividend Aristocrats are relatively modest dividend payers. The current dividend yield of this fund is only around 2.8%; you can find better yields elsewhere.
As noted, however, you are trading net returns for overall security, which is your primary concern as a current or potential retiree. Your second dividend ETF is where you’ll want to start looking for higher returns in exchange for a little more risk.
To this end…
Vanguard Dividend Appreciation ETF
Assuming you’ve already established a rock-solid dividend payout base, add the Vanguard Dividend Appreciation ETF (NYSEMKT:VIG) to your potential shortlist as the second trade to step into.
It is not a difficult fund to understand. The words “dividend appreciation” are in the name for a good reason, as the ETF’s primary mission is to hold stocks that have a proven track record of dividend growth. Although its current yield of 1.5% is lower than the current payout offered by the SPDR S&P Dividend ETF, it is conceivable that in just a few years Vanguard’s fund will be the highest earner.
To that end, the Vanguard Dividend Appreciation ETF’s annual payout has grown from $1.83 just five years ago to $2.66 per share in 2021. That’s a 45% improvement, or compound annualized growth. by 7.8%, beating the pants of inflation over that five-year period.
There is a catch with the Vanguard Dividend Appreciation ETF. While all exchange-traded funds (like all conventional mutual funds) are meant to be bought and held for the long term, you really have to commit to long holding periods with this ETF to make it worthwhile. . If you are at the time in your life where you even consider it, you are ready for this kind of long-term trade.
iShares Broad USD High Yield Corporate Bond ETF
Finally, once you have relative safety and split payout growth from holdings such as the SPDR S&P Dividend ETF and Vanguard Dividend Appreciation ETF, you can begin your search for higher returns. the iShares Broad USD High Yield Corporate Bond ETF (NYSEMKT:USHY) is a great place to start (and maybe end) this hunt.
Market veterans will understand that the words “high yield corporate bonds” are a polite way of saying “junk bonds”. Yes, the iShares Broad USD High Yield Corporate Bond ETF is a high-risk bond fund, with most of its bond holdings rated BBB and BB by Standard & Poor’s. This is the upper level of the junk bond portion of the bond rating scale, but junk nonetheless.
Keep things in perspective, though. These may be higher risk assets than corporate bonds issued by companies with much stronger fiscal bases. But these companies aren’t in default, and most of these debts are items that typically need to be replaced within the next five years, leaving the door open to frequent trade-ins with stronger corporate debt.
Also note that no one issuer represents more than 0.4% of the fund’s current holdings, so the risk inherent in junk bonds is very, very well distributed. The fund’s current above-average dividend yield of 5.3% more than offsets the real degree of risk you’re taking here.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool owns and recommends Vanguard Dividend Appreciation ETF. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.