Stocks and exchange-traded funds (ETFs) that generate good dividends have been an investorʻs best friend during this market correction. High-yielding dividend investments have generally outperformed the overall market with higher total returns. For retirees, they are equally important for the income they can produce on a monthly or quarterly basis.
While there are many great dividend ETFs to choose from, the Invesco S&P 500 High Dividend Low Volatility ETF (SPHD -0.67%) and the First Trust Morningstar Dividend Leaders Index Fund (FDL -0.41%) are two of the best for retirees because of their high yields and solid returns. Here's a look at each of them.
1. Invesco S&P 500 High Dividend Low Volatility ETF
The Invesco S&P 500 High Dividend Low Volatility ETF tracks the S&P 500 Low Volatility High Dividend Index, which is made up of the 50 stocks in the S&P 500 with the highest dividend yields and lowest volatility. These are stable, blue chip companies that are leaders in their industries and generate consistent earnings. Consider the ETF's top three holdings: Williams Cos., Kinder Morgan, and Chevron. About 22% of the portfolio is in utilities, while 19% is in consumer staples and 12% is in healthcare.
One metric to look at with a dividend ETF is the distribution rate, which is the cash flow paid out to investors. It is calculated by annualizing the most recent distribution and dividing it by the net asset value, or share price, of the ETF. There is also a 12-month distribution rate, which is the total of the last 12 months of payouts, divided by the share price. This ETF has one of the highest distribution rates, with a current rate of 3.6% and a 12-month rate of 3.4% as of May 25. The 12-month rate is probably the better indicator, as ETF dividends tend to fluctuate, and the broader snapshot gives a more accurate view.
This ETF pays out a monthly dividend, with the most recent payout in May of $0.14 per share. That works out to $1.68 per share annually if it maintains that payout. So if you owned 50 shares at its current $47 share price, you would have $84 in dividend payouts at yearʻs end.
The other benefit of this ETF is its performance. The ETF is actually up 5% year to date as of May 26, while the S&P 500 is down about 15%. It has gained about 9% over the past year as of April 30, and while it doesnʻt quite have a 10-year track record yet, as it was launched on Oct. 18. 2012, it has posted an average annual return of 11% since inception. That is a good solid return, with a great dividend, that can provide both income and balance to your portfolio.
2. First Trust Morningstar Dividend Leaders Index ETF
The First Trust Morningstar Dividend Leaders Index ETF tracks the Morningstar Dividend Leaders Index. The index uses a proprietary screening model that finds the 100 highest-yielding stocks that have maintained consistent, sustainable dividend policies. Stocks are weighted based upon the dollar value of dividend payments, but no individual security can exceed 10% of the portfolio, and stocks with greater than 5% weight cannot collectively exceed 50% of the portfolio.
Like the Invesco ETF, the holdings are primarily large-cap value stocks of stable companies, but with a significantly broader mix. The three largest holdings are AT&T, AbbVie, and Chevron.
The ETF has a 12-month distribution rate of 3.6%, which is among the highest for ETFs. Unlike the Invesco ETF, it pays out a quarterly dividend, with the most recent in March at $0.28 per share, but the first quarter is typically lower. Last year, it paid out about $1.30 per share, which means if you owned 60 shares at $39 per share, it would come out to $78 per year in income.
This First Trust ETF has also generated great returns relative to the market. It is up 9% year to date as of May 26, beating the S&P 500 by a long shot. Over the past 12 months as of April 30, it is up 11%, and over the past 10 years it has an average annual return of 11%.
Retirees looking for strong ETFs that produce steady income and have had positive returns at a time when the market is in turmoil might want to consider these two options.