These 3 Dividend ETFs Are a Retiree's Best Friend

If you are a retiree who wants long-term exposure to equities without having to spend a lot of time constructing a portfolio by searching out individual stocks, this article is meant for you. If that doesn't describe you, go read something else!

Actually, just about anyone can get something from the discussion that follows, but it really is geared to making a retiree's investment life easier. If you are a retiree looking for long-term exposure to equities, investing in a portfolio of these three exchange-traded funds (ETFs) -- the Vanguard S&P 500 Index Fund (VOO 1.00%), the SPDR Portfolio S&P 500 High Dividend ETF (SPYD -0.15%), and the FlexShares STOXX Global Broad Infrastructure Index Fund (NFRA -0.21%) -- makes a lot of sense. 

Three ETFs for income-seeking equity investors

To know why these particular ETFs are right for retirees, it helps to know a bit about ETFs. Equity ETFs are listed investments that buy shares of stocks, according to criteria laid out by management. The expense ratio is the annual fee that management charges to maintain it -- a lower fee is better, as higher fees can significantly eat into returns over the long term. 

The net asset value (NAV) is the net value of the ETFs assets (stock holdings) divided by the number of shares. It would be best to buy an ETF trading at a discount to NAV and avoid buying it at a premium to NAV. 

Data source: Yahoo! Finance. NAV = Net asset value.

The Vanguard S&P 500 Index Fund and the SPDR Portfolio S&P 500 High Dividend ETF

These two ETFs are lumped together because they give broad-based exposure to equities and have a low expense ratio. The latter is expected, considering they are not actively managed. 

The Vanguard ETF is a low-cost ETF intended to track the performance of the S&P 500 index. The ETF tracks the index well, with a 36-month beta of 1 and a coefficient of determination value of 1. In plain English, those metrics mean they are, statistically speaking, perfectly matched and correlated to the index. It's a pretty safe bet that buying into this ETF will give you long-term exposure to the S&P 500.

The chart below shows why that's been a wise choice since October 2015 (when the SPDR High Div ETF started), and even better if you reinvest the dividends from the ETF into buying more of it. 

Data by YCharts

While the Vanguard S&P 500 ETF has beaten the SPDR Portfolio S&P 500 High Dividend ETF on price and total return over that nearly eight-year stretch, dismissing the latter's not a good idea. The SPDR aims to track the performance of the top 80 highest dividend-paying stocks in the S&P 500 index. As such, it will outperform the S&P 500 index in periods when high-yield investing outperforms, and underperform in the reverse scenario. As such, past performance isn't an accurate indicator of future results. 

In addition, some retirees require a steady income stream, and holding more of the SPDR ETF makes more sense. 

FlexShares STOXX Global Broad Infrastructure Index

The Vanguard ETF offers a "no view" exposure to equities, and the SPDR ETF offers broad-based exposure, but with a "high-yield" twist. The FlexShares STOXX Global Broad Infrastructure Index Fund allows investors to take a "view" of the long-term outlook for global infrastructure spending.

The ETF invests in infrastructure-owning companies "that generate at least 50% of their revenues from six key infrastructure super sectors," according to the company website, namely energy, communications, utilities, transportation, government outsourcing, and social infrastructure.

In a nutshell, it's a play on the need to invest in building and maintaining infrastructure across the globe. It's a priority in developed countries where neglected infrastructure needs to be rejuvenated, and it's also a priority in the developing world, where infrastructural investment is critical to supporting growth. 

The fund's expense ratio is good for an actively managed fund; the dividend yield exceeds the Vanguard offering. 

Image source: Getty Images.

An ETF investment strategy

These three funds are useful as core holdings in a retirement portfolio, and it makes sense to blend them. Passive income-seeking investors might want to allocate more to the SPDR ETF.

At the same time, the FlexShares offering is good for investors who want infrastructure exposure plus a little extra yield. And the Vanguard ETF is an excellent place to park money while looking to find alternative investments or simply as a way to get exposure to the benchmark index in itself.