Investors in retirement typically focus on safety and income, so dividend ETFs can be particularly attractive vehicles for investors in their golden years. ETFs provide diversification for a conveniently low cost, which is a great strategy to keep risk and volatility under control. In addition, dividend paying stocks tend to be particularly solid businesses, and dividends provide recurrent cash income from your portfolio, a crucial consideration among retirees.
With this in mind, Vanguard High Dividend Yield (NYSEMKT:VYM), Vanguard Dividend Appreciation (NYSEMKT:VIG), and WisdomTree Emerging Markets Small Cap Dividends (NYSEMKT:DGS) could be three particularly attractive dividend ETFs for retirement investors.
High dividend yield and low cost
Vanguard High Dividend Yield is one of the most popular ETFs among dividend investors, and for good reasons. The fund offers exposure to mostly large-capitalization dividend-paying stocks across different sectors. Consumer-goods stocks make 15.6% of the portfolio, financials represent 13.9% of assets, technology accounts for 13.4%, industrials represent 12.4%, and the oil and gas sector provides 10.5% of assets under management.
The fund replicates the FTSE High Dividend Yield Index, which has a selection universe based on all U.S. dividend-paying stocks excluding real estate investment trusts. Companies are then ranked based on their forward dividend yield, and holdings are weighted by market capitalization. This results in a portfolio composed mostly of large and well-established dividend stocks. Some of the main holdings in the portfolio are names such as Microsoft, ExxonMobil, Johnson & Johnson, General Electric, and Wells Fargo.
Since the portfolio is tilted toward big and stable corporations with succulent dividend yields, Vanguard High Dividend Yield can be considered a defensive investment. This means the ETF offers below-average volatility, and it can be expected to provide stability and predictability to a portfolio over the long term. However, in times when the markets are rising steeply, investors shouldn't be surprised to see more volatile stocks outperforming the Vanguard High Dividend Yield ETF.
The dividend yield is in the neighborhood of 3.2% at current prices. This is a nice premium versus a dividend yield around 2.3% for the average company in the S&P 500 index. Importantly, Vanguard High Dividend Yield has a conveniently low annual expense ratio of 0.09%, according to Vanguard. This is 92% lower than the average expense ratio of funds with similar holdings.
Focus on dividend growth
Dividend investing is not just about picking companies with big dividend yields. The trajectory of dividend payments can be even more important than the yield itself. According to statistical studies, companies that consistently increase their dividends on a regular basis tend to outperform not only companies with no dividends at all, but also those with stable dividend payments.
Based on data from Ned Davis Research, companies raising their dividends every year delivered an annual return of 9.8% from Jan. 31, 1972, to March 31, 2016. On the other hand, companies with no dividends produced a far more modest annual return of 2.4% during the period under analysis, while dividend payers with no change in dividends delivered an annual return of 7.3%.
Investors looking to position their portfolio in a basket of high-quality dividend growth stocks should look no further than Vanguard Dividend Appreciation. The fund invests in a portfolio composed of 185 dividend growth stocks that have increased their dividends over the past 10 years or more. The past decade includes the tremendously severe Great Recession in 2008 and 2009, so companies that have been able to increase their dividends through this unusually challenging environment are among the strongest and most reliable dividend growth stocks around.
Vanguard Dividend Appreciation is focused on dividend growth as opposed to dividend yield, so it pays a dividend yield of around 2.15%, which is nothing to write home about. Nevertheless, the fundamental quality of the companies in the portfolio is truly unquestionable, and the ETF charges a razor-thin annual expense ratio of only 0.09%.
Hunting for dividend opportunities in emerging markets
WisdomTree Emerging Markets Small Cap Dividends invests in a basket of 700 small-capitalization dividend stocks in emerging markets. Taiwan accounts for 27.63% of assets, followed by China (14.45%), Brazil (10.71%), Thailand (9.05%), and South Africa (7.3%).
Emerging-markets stocks are generally more volatile than companies in developed countries, but they also offer superior potential for economic growth in the long term. Besides, if your portfolio is heavily exposed to the U.S. and other developed countries, adding a healthy dose of emerging markets to the mix can be a smart way to reap the benefits of diversification.
Small-capitalization stocks tend to offer improved exposure to domestic growth trends, and they are generally more isolated from government intervention and regulatory hurdles. When it comes to emerging-markets stocks, good things come in small packages.
WisdomTree Emerging Markets Small Cap Dividends pays a generous 3.92% dividend yield. The annual expense ratio is 0.6%. This is not particularly low in comparison with other ETFs in the market, but it's not excessively high either.
Dividend investing is one of the most effective and time-proven strategies to obtain superior returns from your portfolio over the long term. Investors of all ages can benefit from the power of dividends, and those investing for retirement should probably give dividend strategies special consideration.
Fortunately, these ETFs are offering an easy and efficient way to capitalize on different dividend strategies, such as high dividend yield stocks, dividend growth investing, and dividend opportunities among small companies in emerging markets.