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These 3 Dividend ETFs Are a Retiree's Best Friends

By James Brumley - May 23, 2021 at 5:04AM

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Who says you have to limit yourself to individual stocks when it's time for your portfolio to generate consistent income?

It's not exactly a secret that your age largely dictates how you invest. Younger people with growing wages can afford to take greater risks on growth stocks, since they have time to recover from any cyclical setbacks. Older investors may not have that sort of time -- or stomach for volatility -- and as such tend to play things a bit more conservatively.

Investors already in retirement need even more safety, but also likely need their portfolios to produce income. And there are certainly more than enough reliable dividend stocks for them to consider.

Individual dividend-paying stocks, however, aren't necessarily a retiree's only income-oriented option. Some exchange-traded funds (ETFs) are built from the ground up to serve as a substitute for a collection of hand-picked dividend stocks. Here's a rundown of the first three such ETFs a retiree might want to consider.

A retired couple reviewing their stock portfolio while sitting at a table.

Image source: Getty Images.

Make sure your payments outgrow inflation

It's an all-too-common mistake: An investor steps into a stock because the yield is so high, but as time marches on, that underlying quarterly dividend payment barely budges. If you're needing those dividends to pay the bills, even modest price increases over time can effectively make those payouts less helpful.

The point is, make sure the stocks you're buying for the dividend are stocks of companies that are willing and able to raise that dividend at a pace that at least exceeds inflation.

That's what the Vanguard Dividend Appreciation Fund (VIG 1.44%) does. By virtue of mirroring the Nasdaq U.S. Dividend Achievers Select Index, this fund consists of companies with a history of above-average payout increases that makes its present dividend yield of 1.66% considerably more exciting than it seems on the surface. Perhaps the most compelling aspect of this dividend ETF, however, is that it doesn't force investors to choose income or growth. Microsoft, Visa, and JPMorgan Chase are the sorts of holdings found in the fund. There are value-centric aspects to these names, but by and large these are growth-oriented stocks.

The only catch? New positions in the fund may not drive the sort of income you need in retirement right now. It could take a few years (and a lot of capital appreciation) to build up those dividend payments. It's worth the wait, though.

All the yield, none of the ulcers

High dividends and low volatility? That's the Invesco S&P 500 High Dividend Low Volatility ETF (SPHD 1.30%). What's not to like?

OK, a little perspective is needed. The "high dividends" in question aren't sky-high, and "low volatility" doesn't mean all volatility is eliminated. The fund's holdings are still stocks, and stocks are going to ebb and flow.

The Invesco fund still does what it's supposed to do, though, offering owners a dividend yield of just under 3.9% right now while curbing the uncomfortable marketwide price swings that can often leave investors seasick. See, as the name says, the ETF aims to mirror the S&P 500 Low Volatility High Dividend Index, which is made up of the 50 least-volatile, high-dividend-yielding stocks that make up the S&P 500. Verizon Communications, Altria Group, and utility company Duke Energy are a small sampling of its holdings, almost all of which represent industries that are not only resilient, but noncyclical. These businesses are built from the ground up to collect recurring revenue, making them well suited for supporting ongoing dividend payments.

Not stocks or bonds, but something in between

Finally, add the iShares Preferred and Income Securities ETF (PFF 0.46%) to your list of dividend ETFs that are a retiree's best friend.

If you're not familiar, preferred stocks are a curious category of equities. They're not quite like the conventional common stocks we all know and trade, but they're not bonds, either. They're something in between, designed to provide regular, specific, and fixed dividend payments to their owners. Unlike bonds, preferred stocks don't offer investors a higher level of legal claims on a company's assets in the event of a bankruptcy, yet most preferreds don't have any potential for meaningful price appreciation that reflects the underlying company's growth. The trade-off is an above-average dividend yield and (typically) the prioritization of dividend payments before holders of common stock get anything.

Problem: Preferred stocks can be tough to identify and tricky to trade, and there's often not a great deal of information or research on them. The iShares Preferred and Income Securities ETF solves both of these problems, delegating that complicated work to the fund's managers.

And lest you think the growth-versus-safety trade-off isn't worth it, check this out: The iShares Preferred and Income Securities ETF's current dividend yield is 4.4%, compared to the S&P 500's current average yield of less than 1.4%.

Again, it can't be stressed enough that preferreds rarely offer any opportunity for capital appreciation; they're almost always only good for income. But they're very, very good income drivers.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. James Brumley has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Microsoft, Vanguard Dividend Appreciation ETF, and Visa. The Motley Fool recommends Duke Energy and Verizon Communications. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Invesco Exchange-Traded Fund Trust II - Invesco S&P 500 High Dividend Low Volatility ETF Stock Quote
Invesco Exchange-Traded Fund Trust II - Invesco S&P 500 High Dividend Low Volatility ETF
$46.69 (1.30%) $0.60
Vanguard Specialized Funds - Vanguard Dividend Appreciation ETF Stock Quote
Vanguard Specialized Funds - Vanguard Dividend Appreciation ETF
$157.95 (1.44%) $2.24
iShares Trust - iShares Preferred and Income Securities ETF Stock Quote
iShares Trust - iShares Preferred and Income Securities ETF
$35.13 (0.46%) $0.16

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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