Investing in exchange-traded funds can help retirees solve two challenges they might face in the golden years. Markets change, innovations bring new companies to the forefront, and the profitable companies of today may not be the profitable companies of tomorrow. First, it can ease the pain that comes from researching individual stocks and stressing over which choices to make.
The second challenge to solve is how to generate consistent income in order to replace the once-timely paychecks. Dividend ETFs that pay a monthly dividend, such as the Invesco S&P 500 High Dividend Low Volatility ETF (SPHD -0.55%), can help retirees enjoy a well-managed budget. Let's take a look at that one, plus two others, each with something different to offer retirees looking for a best friend in their investment portfolio.
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1. Invesco S&P 500 High Dividend Low Volatility ETF
As its name implies, this ETF aims to track an index that focuses on the S&P 500 stocks that deliver the highest dividends with the lowest volatility. It limits the reliance on specific sectors, spreading out the balance. A higher asset weight targeting utilities and consumer non-durables, combined with a broader spectrum of stock holdings, provides for more consistency and lower volatility. Rebalancing by the fund's management team twice a year helps adjust for changing market conditions.
The expense ratio is on the higher side at 0.30%, and a somewhat low 45% total annual return -- compared to the S&P 500's 80% -- total annual return over the past five years could be a turnoff, but the trade-off is that the low volatility aspect can help during a challenging market, as noted by the 5.3% gain year to date, compared to the 4% loss experienced by the S&P 500 index. It also offers the primary benefit of timely and more abundant income from monthly dividend payouts -- as opposed to the more common quarterly schedule -- making it easier to manage a budget when the years of timely paychecks are a thing of the past.
Among the top holdings in the ETF's bucket of 51 stocks are a few Dividend Aristocrats -- including Warren Buffett favorites AbbVie, Chevron, and Kraft Heinz -- helping the fund deliver an annual dividend of $1.60 per share at a dividend yield of 3.65%, which is three times that of the S&P 500's 1.3% yield. That $1.60 equates to an extra $13 per month if you own 100 shares; this may not seem like much but can sure help during times of inflation, like right now.
2. Vanguard High Dividend Yield ETF
There certainly seems to be no secrecy when it comes to the naming convention for dividend ETFs. The Vanguard High Dividend Yield ETF (VYM -0.16%) is a good fit for retirees wanting to get the most out of their dividend while benefiting from a low cost to do so -- at a ground-level 0.06% expense rate. The primary goal of this fund is to track the performance of the FTSE® High Dividend Yield Index, which measures the investment return of stocks delivering high dividend yields.
There is a heavy focus on large-cap value companies in stable industries such as healthcare, financials, consumer, energy, and industrials. Companies within those segments provide consistency due to the essential nature of the products being sold, leading to recurring purchases regardless of market conditions. The ETF casts a wide net capturing over 400 stocks that it tracks, while providing some risk management by only having an asset weight of 23.4% in its top 10 holdings.
Among the top 10 holdings are multiple Dividend Kings, including Johnson & Johnson, Procter & Gamble, and Coca-Cola. These companies have been increasing dividends for over 50 consecutive years, helping lead to continued dividend growth for the ETF, which now stands at an annual dividend of $3.10 per share -- an average quarterly payout of $0.78 per share, to go along with a 2.79% dividend yield which doubles the S&P 500's 1.3%, and tops the long-term average of the S&P 500 dividend of 1.86%.
What makes that dividend even better is the low expense ratio of 0.06% -- just a fraction of the ratios for the other two ETFs discussed. And at a total return of 70% over the past five years, the growth of the ETF share price falls in the middle of the three ETFs and tops the Factset segment average of 42%.
3. Wisdom Tree U.S. LargeCap Dividend Fund
Last but certainly not least is the WisdomTree LargeCap Dividend Fund (DLN -0.34%), providing exposure to large-cap equities, based on a benchmark that uses dividends to determine asset weighting. Its total of 300 holdings is more than double the average number of stocks ETFs in this segment have, and a 37% weighting toward the top 15 holdings falls below the Factset segment average of 58%. So although more than a third of its asset weight is allocated toward the top, it does provide more diversification and a safety net against risk for retirees who might have more reliance on consistency.
Where this ETF sets itself apart from the other two is that it has 50% of its top holdings in stocks belonging to the elite group of dividend aristocrats or kings. Not only does it generate dividends, but its top holdings focus on established companies paying the strongest and most consistent dividends. This has helped the ETF deliver the highest five-year total returns of the ETFs discussed -- at 81% -- which crushes the segment average of 22% and is in line with the S&P 500.
Those higher total returns do come at a price though, in the way of a 0.28% expense ratio compared to the 0.06% ratio of Vanguard's ETF. But for investors who are willing to pay a little extra in expenses to have a fund that focuses on dividend weighting more so than market-cap weighting, the total return potential, depending on the size of your investment, can make up for a smaller dividend and a higher expense.
If you're a retiree, or knocking on the door of retirement, one of these three ETFs could answer and end up being one of your best friends throughout your golden years.
