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These 2 Dividend ETFs Are a Retiree's Best Friend

By Jeff Little – Dec 17, 2021 at 8:16AM

Key Points

  • Retirees are looking for consistent income in lieu of paychecks.
  • A volatile market can lead to declines in stock prices that need to be offset by dividends.
  • Protection against Fed rate hikes could save your investment.

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Diversification can be rewarding in a volatile market

If you're lucky enough, from a career perspective, to be in or on the doorstep of retirement, you've likely put some thought into what you can do to keep bringing home the bacon while you're not tirelessly dedicating your hours for a paycheck. Making the right investments to meet your goals in retirement can be a daunting but extremely rewarding task.

One approach for a long-term investment strategy is to include dividend-based exchange-traded funds (ETFs) in your investment portfolio. These funds can carry varying holdings, from government bonds to shares of the highest-performing technology stocks in the market. Below are two ETFs, each with their own characteristics, that can draw the attention of any investor looking for a best friend in retirement.

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1. Schwab US Dividend Equity ETF

Considering how close you might be to retirement or how far along you are into retirement can help determine which type of ETF or combination of ETFs is best for you. The Schwab US Dividend Equity ETF (SCHD 0.29%) focuses on tracking stocks in the Dow Jones 100 Dividend Index, including a diversified set of stocks evenly weighted within the ETF portfolio representing its top holdings in the sectors of financial services, technology, industrials, and healthcare. This diversification and even weighting provide a cushion of protection against a significant market decline in any one particular sector or stock.

Among its top stock holdings are Merck, Home Depot, Texas Instruments, Broadcom, and Amgen. All of these companies can hold claim to providing investors with dividends that have been paid out and increased annually for over 10 years.

The ETF itself has performed quite well, dating back to a five-year history. Over that span, it boasts an average annual return of 16.4%, highlighted by a one-year return of 51%. It pays out a dividend at a yield of 2.9% and also carries a low expense ratio of 0.1% compared to the average ETF , meaning the amount of your investment that is deducted annually in fees will be lower, which could be a determining factor for some investors.

A high rate of return, combined with a diversified portfolio of holdings, a low expense ratio, and a dividend yield of 2.9% above that of the S&P 500 November yield of 1.75%, is certainly what some might consider a great offer for reliable retirement income.

2. Fidelity Dividend ETF For Rising Rates

As the Fed hints at three rate hikes in 2022, it might benefit retirees to invest in ETFs that protect against those rates. The Fidelity Dividend ETF For Rising Rates (FDRR 0.76%) can do just that. This fund focuses on tracking large- and mid-cap stocks that have historically paid and increased dividends and have a positive correlation to the 10-year U.S. Treasury Yields.

Top holdings include Apple, Microsoft, UnitedHealth, Pfizer, and Home Depot, providing a well-rounded group of stocks across various sectors. It also draws away from a high reliance on its top holdings by only investing 30% of its total fund weight into the top 10 holdings.

In times of uncertainty in the market, the Treasury yield can provide some investors relief. The Treasury yield is tied to Treasury securities backed by the U.S. government and comes with guaranteed interest payments. As volatility in the market grows, the investments in this fund can provide for some stability.

In finding an ETF that's right for a retiree, it's good to have a solid history of performance. The Fidelity Dividend ETF For Rising Rates has an average annualized return of 14% over the life of the fund. That rate is helped along by a one-year return of 24%. That shows it can prove successful across administrations from two different political parties and through a worldwide pandemic.

The dividend yield of 2% will not necessarily gain bragging rights among all ETFs, but it does meet the average S&P 500 dividend yield. In addition, the ETF also offers a low expense ratio of 0.3% compared to the average ETF expense ratio of 0.54%, allowing for more of the investor's money to stay in the investment rather than going toward fees paid to have the investment.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Jeff Little owns Apple. The Motley Fool owns and recommends Apple, Home Depot, Microsoft, and Texas Instruments. The Motley Fool recommends Amgen and UnitedHealth Group and recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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