Dividend ETFs are one of the best investments retirees can make. You need passive income and limited volatility to navigate your golden years, and these vehicles provide both. Dividend income can supplement Social Security and provide cash flow for your lifestyle and basic needs. Meanwhile, the diversification provided by ETFs helps to dilute risk and limit the amount your portfolio can fluctuate in value. As always, the trick is figuring out which ones are the best-in-class and best suited to your investment goals.
1. The Vanguard High Dividend Yield ETF
The Vanguard High Dividend Yield ETF (VYM 1.03%) is a straightforward and efficient tool that provides diversified dividend income. This fund holds more than 400 stocks, the vast majority of which are large-caps. Stocks are selected on the basis of forecast dividends, then weighted according to market cap.
This might be the most passive strategy that can be applied to an ETF that's more selective than an index fund. That results in an ultra-low 0.06% expense ratio, which is great for investors looking to minimize costs. It's also a large fund with nearly $39 billion of assets under management and over $100 million in daily trading volume. That means that it's highly liquid, so it's easy to sell and won't reduce your returns with a high bid-ask spread.
Its 2.78% distribution yield isn't anything to write home about, but it's still well above the S&P 500 average, especially in current market conditions. The Vanguard High Dividend Yield ETF is a simple, straightforward option for retirees who don't want to overthink it and don't need to chase high yields.
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2. ProShares S&P 500 Dividend Aristocrats ETF
The ProShares S&P 500 Dividend Aristocrats ETF (NOBL 1.14%) significantly narrows the scope of the Vanguard High Yield fund by only holding stocks with exceptional historical pedigree. This ETF holds 66 stocks, all of which are S&P 500 constituents that have increased their dividends each of the past 25 years.
These Dividend Aristocrats have demonstrated that they can sustain growth and profit margins over the long term, and that they are committed to returning cash flows to their shareholders. Stocks are equally weighted within the portfolio, too, so the largest companies aren't dictating performance excessively.
This backward-looking approach focuses on proven stability instead of future opportunity. As a result, the distribution yield is a more pedestrian 1.92%. Investors also have to pay a higher 0.35% expense ratio. Still, this is a great ETF if you prioritize peace of mind or want to buy an ETF that doesn't just track major stock indexes.
3. Global X SuperDividend ETF
The Global X SuperDividend ETF (SDIV 1.62%) is a big departure from vanilla methodologies, so it's great if you're looking for something off the beaten path. This ETF holds the 100 highest-yielding stocks that pass liquidity and financial stability screens.
It also doesn't limit itself to large-cap U.S. companies -- it includes companies from all over the world, including emerging markets. The resulting allocation is skewed much more toward international, mid-cap, and small-cap stocks. This methodology drives great dividend yield without compromising too much on company quality.
Global X SuperDividend ETF shareholders are subject to higher volatility that's inherent in emerging market and small-cap investing, but it might be worth it for retirees. The ETF reports an impressive 7.51% distribution yield right now, which is more than enough to justify its hefty 0.59% expense ratio. It's a bit less liquid than other funds on this list, but that shouldn't be an issue for most retirees, especially if you're looking to hold it long term for the income.
These ETFs might not be suitable for everyone's retirement allocation, but they each fulfill a different role that could be the perfect addition to your portfolio. Keep in mind that distribution yield is subject to change based on market conditions and corporate policy. There are dozens of great ETF options for retirees, but these three deserve a look from anyone searching for low-risk income investments.
