If you're looking for income in retirement or would just like cash regularly arriving in your retirement investment accounts, it's hard to go wrong with dividends. They get paid in strong markets and weak markets alike (except in relatively rare instances, when a company is struggling and needs to decrease, suspend, or eliminate its payout). And the dividends of healthy and growing companies are increased fairly frequently, too -- often once per year. Those increases help your payouts keep up with inflation -- and even exceed it.
A particularly easy and effective way to invest in dividend-paying stocks is to do so via exchange-traded funds (ETFs) that focus on dividends. (ETFs are funds that trade like stocks, permitting you to buy as few or as many shares as you'd like.) Here are five solid candidates to consider for your portfolio.
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1. Vanguard Dividend Appreciation ETF
The Vanguard Dividend Appreciation ETF (VIG 0.29%) is an often-recommended dividend-focused ETF. It's an index fund with very low annual fees (just 0.06%), and it tracks the Nasdaq US Dividend Achievers Select Index -- which includes securities that have increased their payouts annually for at least 10 years. The index recently featured 212 components, and the Vanguard ETF simply copies them. Its top holdings recently were Microsoft, Walmart, Johnson & Johnson, Procter & Gamble, and UnitedHealth Group, and its dividend yield was recently 1.66%.
2. Schwab U.S. Dividend Equity ETF
The Schwab U.S. Dividend Equity ETF (SCHD 1.11%) tracks the Dow Jones U.S. Dividend 100 Index, which is focused on "high-dividend-yielding stocks in the U.S. with a record of consistently paying dividends, selected for fundamental strength relative to their peers, based on financial ratios." It also looks for companies that are increasing their payouts. The ETF charges just 0.06% annually and has about a quarter of its assets in financial stocks, about 20% in industrials, and about 16% in consumer defensive companies. Its top holdings recently were ExxonMobil, Altria, Texas Instruments, 3M, and United Parcel Service, and the ETF recently yielded 3.4%.
3. Vanguard High Dividend Yield ETF
The Vanguard High Dividend Yield ETF (VYM 0.84%) also charges just 0.06% annually, and tracks the FTSE High Dividend Yield Index, which focuses on high-yielding companies. It recently yielded 3.06% and held about half its assets in financials, healthcare, and consumer staples companies. Its top holdings recently were Johnson & Johnson, JPMorgan Chase, Procter & Gamble, Bank of America and Intel. The fund is market-cap weighted, meaning that the holdings that have the highest market value will be weighted more heavily in the fund. This means that smaller companies won't carry as much weight, but it also means that if any components are in trouble and shrink in size, so will the proportion of the fund they represent.
Dividends deliver cash regularly. Image source: Getty Images.
4. SPDR S&P Dividend ETF
The SPDR S&P Dividend ETF (SDY 0.91%) aims to offer roughly the same performance of the S&P High Yield Dividend Aristocrats Index (less fees). Its annual fee is higher than many other dividend-focused ETFs, at 0.35%, but that's still much lower than most mutual funds. That index holds companies in the S&P Composite 1500 Index "that have followed a managed-dividends policy of consistently increasing dividends every year for at least 20 consecutive years." The ETF recently yielded 2.7%, and its top holdings recently were ExxonMobil, AT&T, People's United Financial, Chevron, and Federal Realty Investment Trust.
5. Invesco KBW High Dividend Yield Financial ETF
The Invesco KBW High Dividend Yield Financial ETF (KBWD 1.43%) is a bit different from the other funds above. It's highly focused on the financial sector (with about 70% of its assets in it, and the rest mostly in real estate) -- and it sports a much higher yield, recently 7.8%. It aims to park at least 90% of its assets in companies that are in the KBW Nasdaq Financial Sector Dividend Yield Index and that have solid dividend yields. Don't invest in this if you're bearish on the prospects of the financial services or real estate sectors, and keep up with its progress at least quarterly to ensure that it's still performing well. Its top holdings recently were Prospect Capital, Apollo Commercial Real Estate Finance, Orchid Island Capital, Ares Commercial Real Estate, and Apollo Investment. This ETF also sports a hefty annual fee of 1.24%. So invest in this ETF with your eyes open, and bail if its appealing characteristics start changing.
There are gobs of other dividend-focused ETFs and mutual funds out there, along with many terrific dividend-paying stocks, and they can deliver welcome income in retirement. A little digging might turn up some you like even more than the ones above, though these five do warrant consideration.
