Retirees look back with envy at the days before the Great Recession. Back then, a simple money market fund could fetch you 4% with absolutely no risk at all. These days, you're lucky if you can find something approaching 1.5%.
But don't despair. There are alternatives, and while they carry the risks of losing capital over time, you get both out-sized dividends and the possibility of price appreciation to boot.
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We've asked three Motley Fool investors to pick out their favorite high-yield ETFs for retirees. Read below to find out why Vanguard Long-Term Corporate Bond ETF (VCLT +0.88%), Vanguard REIT ETF (VNQ +0.44%), Vanguard High Dividend Yield ETF (VYM +0.13%) and are all worth investigating.
High yields and low fees are recipe for success
Brian Stoffel (Vanguard Long-Term Corporate Bond): The thesis behind investing in this ETF is simple: Vanguard buys the bonds of relatively healthy corporate entities -- currently 1,721 different companies, to be exact -- with a weighted maturity of 10 to 25 years. Because these bets are spread out across so many different corporate bonds, the risk of any one company defaulting shouldn't prove fatal to any retirement portfolio.
Here's the breakdown of the quality behind the ETF's investments by investment grade.
Where Vanguard Buys Its Long-Term Bonds
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While the safest investments (AAA and AA) are under-represented, that is also what makes it possible for the ETF to get slightly higher yields. Crucially, however, Vanguard doesn't invest any of this money in junk bonds -- defined as anything below a BAA rating.
Currently, the ETF is yielding an attractive 4.1%, and your fees for the investment are only 0.07%. While this fund probably won't be a market-beater (that's why I haven't given it a green-thumb in my CAPS profile), that shouldn't be your goal in retirement anyway; it should simply be to get enough passive income to allow you to live your Golden Years on your terms.
Real estate can add diversification, and a nice income stream
Matt Frankel (Vanguard REIT ETF): One ETF that I like for retirees is the Vanguard REIT ETF, which tracks an index of real estate investment trusts (REITs) that own various types of commercial properties.
There are a few reasons why this ETF could be a smart addition to a retiree's portfolio. For one thing, it adds diversification. Even if you own an ETF or mutual fund that focuses on high-dividend stocks, many of these specifically exclude REITs. REITs tend to move differently than the rest of the market, so this can help to offset the volatility of your other stock investments.
Additionally, REITs tend to pay above-average dividends. As of this writing, the fund pays a 4.7% dividend yield, and many of the index's top holdings have excellent track records of dividend increases. To name a few examples from the fund's top five holdings, Simon Property Group has increased its dividend dramatically in recent years, including a big raise earlier in 2017. Healthcare REIT Welltower has increased its payment nearly every year throughout its 47-year history.
Finally, REITs are designed as total return investments, meaning that they aim to generate income as well as growth as the underlying property portfolios increase in value. Welltower, for instance, has generated 15.5% average total returns for nearly half a century. Growth is important for retirees, as it helps to keep up with, or even beat, the effects of inflation.
It's hard to go wrong with this popular high-yield ETF
Steve Symington (Vanguard High Dividend Yield ETF): Just as its name implies, the primary focus of this ETF is investing in common stocks of companies with high dividend yields.
More sepcifically, with $26.1 billion fund total net assets, the Vanguard High Dividend Yield ETF is the largest fund of its kind that aims to track the performance of the FTSE High Dividend Yield Index. That means you get a diversified basket of 406 mostly large-cap, value-oriented stocks with higher-than-average dividend yields. The ETF currently boasts an impressive 30-day Securities and Exchange Commission (SEC) yield of 2.95%, well above the S&P 500's current 1.89% dividend yield.
And of course, in keeping with Vanguard's propensity for ultra-low fees, the Vanguard High Dividend Yield ETF has an expense ratio of just 0.08%, or 92% lower than the average of funds with a similar end goal. As such, it's hard to find a better option for fee-averse retirees with a hunger for healthy dividend payments.
