If you're looking for passive income in retirement, dividend stocks are a solid bet. Investing in companies with a track record of steadily increasing dividend payments can mitigate the effects of inflation. Plus, companies that have a long track record of dividend payments usually have strong balance sheets, making them good picks for a retiree's investment portfolio.
But relying on just a few stocks for dividend income is risky. Individual companies can reduce their dividend payments or nix them altogether if they fall on tough times. Investing in dividend ETFs, or exchange-traded funds, is a much safer bet. With a single investment, you can invest in dozens or even hundreds of dividend-paying stocks, spreading out the risk and diversifying your investment.
Let's take a closer look at three dividend ETFs that have the potential to make your retirement richer.
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1. ProShares Dividend Aristocrats ETF
When you're investing in dividend stocks, you don't want to simply look for the highest yield. Finding companies that steadily increase their dividend payments over time is a great way to combat inflation. If you're seeking dividend growth, look no further than the ProShares Dividend Aristocrats ETF (NOBL -0.17%).
The ProShares Dividend Aristocrats ETF allows you to invest in 64 stocks that have earned Dividend Aristocrat status. Dividend Aristocrats are members of the S&P 500 index that have increased their dividends on a per-share basis for at least 25 consecutive years. They also must have a float-adjusted market capitalization of at least $3 billion and have a minimum average daily trading volume of $5 million for the prior three months.
It's important to remember that even with Dividend Aristocrats, future dividend payments are never guaranteed. However, the companies on the list have increased their dividend payments even during prolonged economic downturns. Once a company makes the list, it will typically fight to maintain the coveted status.
At the end of 2021, the fund was most heavily concentrated in consumer staples (20.78%), industrials (20.24%), and materials (12.59%). The ETF limits the weight of any single stock market sector to 30%.
As of Jan. 31, the ProShares Dividend Aristocrats ETF had a 30-day SEC yield of 2%, significantly higher than the S&P 500's 30-day yield of 1.28%. The fund has an expense ratio of 0.35%, which means that $3.50 of every $1,000 goes to fund management expenses.
2. Schwab U.S. Large-Cap Value ETF
As the market sours on high-growth tech stocks, value stocks are becoming fashionable again. Value stocks are typically mature, stable businesses that don't need to reinvest all their excess cash to fuel growth. That makes them a reliable source of dividend income and a low-volatility option for investors approaching retirement.
If you're seeking to earn dividend income through undervalued stocks, consider the Schwab U.S. Value ETF (SCHV -0.20%). The fund's benchmark index is the Dow Jones U.S. Large-Cap Value Total Stock Market Index, an index of 538 U.S. stocks that are classified as value stocks based on criteria like projected price-to-earnings ratio, projected earnings growth, price-to-book ratio, and 12-month dividend yield.
The fund's five largest holdings at the end of 2021 were Berkshire Hathaway Class B shares, JPMorgan Chase, Johnson & Johnson, Home Depot, and Procter & Gamble.
The Schwab U.S. Large-Cap Value ETF had a 30-day SEC yield of 2.1% as of Feb. 24. It also has a dirt cheap expense ratio of 0.04%, meaning that if you invested $1,000, just $0.40 would go toward fees.
3. Vanguard Real Estate ETF
A final ETF that deserves a look if you're seeking dividend income in retirement is the Vanguard Real Estate ETF (VNQ -1.06%). The fund invests primarily in real estate investment trusts (REITs), which are stocks that own commercial properties. REITs are popular with income investors because their legal structure requires them to return at least 90% of their taxable income to shareholders via dividends.
The fund has a broadly diversified mix of 168 real estate holdings that include data centers, cell tower properties, retail space, office buildings, hotels, residential property, and warehouse buildings. No single holding can account for more than 25% of the ETF's portfolio.
The fund's 12-month yield was 2.79% as of Feb. 25, more than double the S&P 500's average yield. The expense ratio is a relatively low 0.12%. With total assets of more than $45 billion, Vanguard's Real Estate ETF is by far the largest real estate ETF.
Should you invest in dividend ETFs?
If you're looking for retirement income, dividend ETFs are a great place to start. You get instant diversification, which reduces the risk of any single investment faltering. Plus, dividend-paying companies tend to be stable businesses, making them a good investment for retirees who have less room for volatility.
Even if you're decades away from retirement, dividend ETFs deserve a look. By investing in stocks and ETFs that grow their dividends over time, you could lock in serious dividend income to enjoy later on.
