Whoever said that dogs are man's best friend probably wasn't retired. Sure, it's great to have Fido around for company, but he can't pay the bills as well as a dividend ETF can. In this era of low bond yields, dividend ETFs are an increasingly attractive alternative for retirees who need a reliable stream of income to supplement their Social Security.
The trade-off of dividend investing over fixed income investing, of course, is the added risk associated with equities. Share prices and even dividend payments can fluctuate in the short term. As a retiree, you want to minimize those ups and downs, particularly with respect to your income. You can do that by selecting dividend ETFs that focus on quality as well as yield. Here are four that fit that mold.
1. Vanguard Dividend Appreciation ETF (VIG -4.05%)
VIG tracks the NASDAQ U.S. Dividend Achievers Select Index, which includes companies that have increased their dividend annually for 10 consecutive years (excluding limited partnerships and REITs). The index is weighted by market capitalization, so larger companies have a proportionally greater influence. VIG holds all 212 companies within the index, including Microsoft, Walmart, and Proctor & Gamble.
Its expense ratio is 0.06% with a dividend yield of 1.67%. That is on the lower side, but you can chalk that up to the cost of quality. While all four of the funds on this list incorporate some type of quality screen, only VIG limits its holding to companies that have increased dividends for at least 10 years consecutively.
2. iShares Core Dividend Growth ETF (DGRO -3.75%)
DGRO's portfolio includes companies that have paid dividends for at least five consecutive years. That criteria on its own isn't very restrictive, but the fund also screens out companies that may have unsustainable payouts. These include companies with payout ratios greater than 75% and those in the top decile of dividend yield. High yield is great for shareholders, but if it's the result of a falling share price, it could signal an upcoming dividend cut as well.
The fund tracks the U.S. Morningstar Dividend Growth Index, but it doesn't hold every position in the index. Instead, the portfolio is a representative sample of companies that mimic the index's behavior. Major holdings include Johnson & Johnson, JPMorgan Chase, and Apple.
DGRO has an expense ratio of 0.08% and its dividend yield is 2.27%.
3. Schwab U.S. Dividend Equity ETF (SCHD -3.12%)
SCHD tracks the Dow Jones U.S. Dividend 100 Index. Included companies have 10 or more years of consecutive dividend payments and also rank well on cash flow, return on equity, dividend yield, and dividend growth. As with VIG, REITs are not eligible. The fund holds all 100 companies in the index, including Coca-Cola, Pepsi, Texas Instruments, and 3M.
SCHD has an expense ratio of 0.06% and a strong dividend yield of 3.45%.
4. First Trust Morningstar Dividend Leaders Index Fund (FDL -2.13%)
FDL replicates the Morningstar Dividend Leaders Index. The index is yield focused, but dividend sustainability and consistency are also inclusion criteria. The fund includes all 100 companies in the index, and they're weighted according to shares outstanding and dividend size. AT&T, AbbVie, Philip Morris, and Verizon are top holdings.
FDL is less efficient than the other three funds with an expense ratio of 0.45%, but the yield of 4.32% is about the highest you'll find without sacrificing too much on quality.
Choose quality for peace of mind
When it comes to choosing a dividend ETF to provide retirement income, quality is a primary consideration. Think through how much fluctuation in income and share price you can handle. If your risk tolerance is low, choose a more conservative fund like VIG. If you can handle less consistency and want a higher payout, FDL may have a place in your portfolio.
Yield is nice, but so is your peace of mind. Go with a dividend ETF that delivers both.