Just as you have an investment strategy leading up to retirement, it is also important to tweak that strategy in retirement to meet your evolving needs. You can find many great Motley Fool articles about how to effectively manage your investments while in retirement, but one element of that strategy should be to supplement your income through dividend stocks or funds.
There are many great dividend stocks out there, but you should also consider dividend-producing exchange-traded funds, or ETFs, which are specifically designed to maximize your income. Here are two dividend ETFs that really stand out.
1. The Schwab U.S. Dividend Equity ETF
The Schwab U.S. Dividend Equity ETF (SCHD 0.28%) is one of the most consistent dividend producers out there. The ETF tracks the Dow Jones U.S. Dividend Index, which includes the 100 largest, most-stable blue-chip companies that generate dividends. That's important because typically, the larger and more established the company, the more stable it is, having weathered the market's ups and downs with its dividend intact.
Consider the ETF's three largest holdings: IBM, which has one of the best dividends on the market with a yield of 4.4%; Home Depot, which pays a 2% yield; and Pfizer, with its 3.9% yield.
The Schwab U.S. Dividend Equity ETF has a yield of about 2.9%, which is certainly higher than the average yield on the S&P 500, which is about half that. And because this is a concentrated pool of just blue-chip companies, the yield has been steady over the years -- ranging from about 2.6% to 3.3% annually over the last eight years or so, but typically right in that 2.9% area. That's crucial because the yields are tabulated from the yields of the underlying stocks, so they differ wildly from a broader ETF, or one that's not focused on dividends.
In the first quarter, it paid out $0.50 per share. Last year, it paid out about $2.02 per share, which was up from the previous year, so even through the pandemic, it was able to increase its dividend.
The great thing about this ETF is it's cheap, with an expense ratio of 0.06%, and it has had excellent performance over the years. Since its inception in 2011, it has posted an average annual return of 15.8%. Over the past year through May 31, it is up 51.7%. And year-to-date in 2021, it has returned 20.8%.
2. The SPDR S&P Dividend ETF
The SPDR S&P Dividend ETF (SDY 0.11%) is also designed to generate dividend income as it tracks similar to the S&P High Yield Dividend Aristocrats Index. Dividend Aristocrats are S&P 500 stocks that have raised their dividends annually for 25 or more consecutive years. So you're talking about the best, most consistent dividend stocks that have managed to deliver, and raise, their dividends through all market cycles, including the Great Recession and more recently the pandemic.
The index that the SPDR S&P Dividend ETF tracks is a slight variation on the traditional definition of a Dividend Aristocrat, as it only includes companies that have increased their dividend for at least 20 straight years, as opposed to 25. Plus, it weights the stocks by yield, so the higher the yield, the larger the weighting in the portfolio. In addition, it also screens for capital growth characteristics, so it is not just purely about dividend yield.
Like the Schwab fund, it is very concentrated with about 115 of the best dividend producers on the market from established blue-chip companies. The top three holdings are IBM; National Retail Properties, a real estate investment trust with a yield of 4.2%; and pharmaceutical company AbbVie, with a yield of 4.5%.
The SPDR S&P Dividend ETF has an average dividend yield of about 2.64%. At its share price of about $126, it paid out a per-share dividend of $0.81 in the first quarter. Last year, it paid out $2.63 per share, but this year it's on pace to increase that. The current 2.64% average yield is on the low side of where it's been over the last 10 years, likely due to the recession and pandemic. Over the previous decade, the yield has been in the 3% to 4% range, with a high of 5.62% in 2016. As the economy improves, expect that yield to go up.
Like the Schwab ETF, it also has a great track record for returns, averaging a 12.7% annual return over the last 10 years through May 31. Over the past 12 months, it's up 42.3%, and year to date has gained 19.2%. This ETF, however, has a higher expense ratio than the Schwab fund at 0.35%.
So if you're looking for dividend income in retirement, you really can't go wrong with these two ETFs. They only invest in the most stable dividend producers and are designed to deliver income in any market cycle, with solid long-term returns as a bonus.