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These 2 Dividend ETFs Are a Retiree's Best Friend

By Demitri Kalogeropoulos – Sep 22, 2021 at 10:30AM

Key Points

  • These funds are a great way to boost income without making your portfolio too volatile.
  • They'll likely trail the market during boom times but outperform during pullbacks.
  • As passively managed ETFs, they'll also keep your expenses low.

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They deliver instant diversification and income.

While investing styles may vary, often depending on your financial situation, there are a few must-have characteristics that apply to any retiree's portfolio. Diversity and steady income rank near the top of that list.

A dividend-oriented exchange-traded fund (ETF) accomplishes both goals with one purchase, immediately delivering a basket of income investments that can act as a steadying force in your portfolio. Yet, unlike less volatile investments such as bonds and CDs, these ETFs also have the potential to deliver significant capital gains.

Let's look at two attractive options from the universe of dividend ETFs: the Vanguard High Dividend Yield ETF (VYM -1.75%) and the SPDR S&P Dividend ETF (SDY -1.79%).

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1. Vanguard High Dividend Yield ETF

Overseen by one of the biggest mutual fund companies in the country, the Vanguard High Dividend Yield ETF focuses on major companies with above-average yields. Buying into this fund will give you a collection of some of the biggest businesses in the market across every industry, such as Johnson & Johnson, Home Depot, and Cisco Systems.

It's a passively managed index fund (tracking the FTSE High Dividend Yield Index), which means investors aren't subject to high costs. In fact, the expense ratio is a rock-bottom 0.06%. Vanguard is well-known for its low fees.

What's more, it gives you a nice yield. Its current payout is 2.7%, or more than a full percentage point higher than the broader market's 1.3% level.

At the same time, its basket of stocks has performed well too. So far in 2021, the ETF is up 12% compared to the wider market's 16% gain. Pairing capital gains with higher dividends makes this a compelling option for retirees seeking income.

2. SPDR S&P Dividend ETF

Another option for investors to consider is the SPDR S&P Dividend ETF, which aims to replicate the performance of the highest-yield Dividend Aristocrats in the S&P 500. These are large, established companies that have paid out and raised their dividends for at least 20 consecutive years. A few of the biggest holdings in the fund are AT&T, Chevron, and IBM.

The fund will give you a dividend yield of about 2.6% today -- higher than the market's yield in part because this ETF tilts more toward value-oriented industries, such as utilities, industrials, and financials.

While its 0.35% expense ratio is greater than Vanguard's, that's still well below the fees you'd be subjected to by purchasing an actively managed fund.

The ETF has also delivered a good mix of capital gains and income. So far in 2021, the SPDR S&P Dividend ETF is up 17%. While that's less than the market's gain, it pays more than double the yield you'd get with a whole-market index fund. So a retiree might gladly take that underperformance in exchange for a higher yield.

Both of the above ETFs are likely to trail the wider market in a period of surging economic growth like we've seen for much of 2021. The flip side of that risk is that they should outperform during pullbacks, recessions, and market crashes. That hedging factor makes these ETFs even more attractive for retirees who are aiming for stable cash flows from a big basket of dividend stocks -- no matter what happens with the stock market.

Demitri Kalogeropoulos owns shares of Home Depot. The Motley Fool owns shares of and recommends Home Depot and Vanguard High Dividend Yield ETF. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.

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