Once you retire, your income from work stops, but many of your expenses still continue. That makes dividend stocks a tempting prospective investment for retirees who are looking to balance current income with long term growth to cover their costs both today and well into the future.
The challenge with dividends, though, is that they are never guaranteed payments. When a company cuts its dividend, its share price often falls, thus evaporating both the income and a good portion of the capital that generated it. Investing in ETFs instead of individual stocks can help buffer that risk, as not every company will cut its dividend simultaneously. With that in mind, these three dividend ETFs could be a retiree's best friend in the quest to find some source of income once work ends.
No. 1: Vanguard Dividend Appreciation Index ETF
The Vanguard Dividend Appreciation Index ETF (VIG -0.20%) seeks to track the performance of the S&P U.S. Dividend Growers Index.That index seeks out U.S.-based companies that have at least a 10 year history of increasing their dividends, excluding Real Estate Investment Trusts. In addition, the index passes on the highest yielding 25% of companies that would otherwise qualify.
That combination of factors helps the Vanguard Dividend Appreciation Index ETF try to exist in a "goldilocks" zone when it comes to dividend quality. When a company's dividend is at risk of being cut, it often shows up as having a higher yield, as the market is starting to price in that risk. While not a perfect screen, keeping the highest-yielding companies out of the fund does help mitigate the worst of those risks.
At a modest 0.06% expense ratio, investors get the benefit of investing in a fairly broad pool of companies with decent dividend growth histories at a low overhead price.
No. 2: SPDR S&P Dividend ETF
The SPDR S&P Dividend ETF (SDY -0.43%) seeks out higher-yielding companies that are part of the S&P Composite 1500 Index with at least a 20-year history of increasing their dividends. The S&P High Yield Dividend Aristocrats Index that the fund tracks is yield-weighted, but it adjusts its weightings to assure no one stock has more than a 4% impact on the index.
The higher-yield focus does mean that it offers investors a somewhat larger payout, right around 2.3%, versus the 1.8% of the previous fund. That higher yield comes with some trade-offs, though. First, its expense ratio is a bit higher, at around 0.35%. Second, companies that offer higher yields tend to also be slower growers than ones that don't pay dividends. This is at least in part because every dollar spent in a dividend can't be reinvested into driving further growth for the business.
Still, if you're looking to balance current income with the potential for income growth over time, the SPDR S&P Dividend ETF is certainly worth considering.
No. 3: Vanguard Real Estate ETF
Real estate has long been known as an industry that generates cash. As a result, there's a special kind of company, known as a real estate investment trust (REIT), that owns real estate and must pay out at least 90% of its earnings as dividends every year. That mandatory dividend payment pretty much assures that if a REIT is profitable, it will offer a decent yield.
To capitalize on that, the Vanguard Real Estate ETF (VNQ -0.57%) seeks to track an equity REIT index that looks across all capitalization of property/equity REITs, as opposed to mortgage REITs, in the United States. The Vanguard REIT offers investors that range of holdings for a modest 0.12% expense ratio. In return, investors get a reasonable 2.2% current yield and a high likelihood of at least some income, virtually no matter what the economy is doing, thanks to the mandatory dividend payout.
Plus, of course, as rents rise because of inflation, that leads to the possibility of higher income for the REITs that the Vanguard Real Estate ETF owns. When that's combined with the mandatory payouts that REITs have to make, it offers a path to future income growth for the ETF's shareholders as well.
Income today and the potential for more tomorrow
All three of these ETFs offer investors a higher current yield than the overall S&P 500, while still keeping the potential of future income growth in the future. That makes them tremendous candidates for retirees to consider as they look to cover their costs once their paychecks stop.
The thing to remember about dividend-focused investments, though, is that you must buy them before their ex-dividend dates to get the next payment. So if you're interested in this type of investment, get started now, and boost your chances of seeing the income you're looking for.
