Dividend stocks are ideal for people who are at or near retirement. Compared to their more growth-focused counterparts, these investments tend to involve less risk due to the mature nature of their industries. Dividend stocks deliver a stream of passive income that can be extremely valuable when you've exited the workforce and lack that steady paycheck, too.
However, there are downsides to investing in them as well. As is true with any individual stock purchase, you risk shares dramatically underperforming the market due to any number of unforeseeable events. Any single dividend stock could also simply be a drag on your portfolio's returns through weak capital appreciation or tiny annual dividend hikes.
That's where exchange-traded funds (ETFs) shine. You can own a basket of dividend stocks through these funds, instantly delivering diversification without sacrificing much yield. Let's look at a few great ETFs, along with some strategies for incorporating them into your retirement portfolio.
1. Vanguard High Dividend Yield ETF
The Vanguard High Dividend Yield ETF (VYM 0.53%) is focused on large, established companies that pay generous dividends. The flip side of that high payout is that these companies aren't known for especially strong profit growth. Earnings are rising at about 7% annually, on average, and the dividend yield is 2.8% today, or about double the rate you'd receive from owning the Vanguard S&P 500 ETF.
Retirees who buy this ETF will typically get exposure to stocks and industries that aren't currently in vogue, which helps explain why the yields are so high. A few of its top holdings are ExxonMobil, Procter & Gamble, and Walmart. Its expense rate is extremely low at 0.05% compared to industry peers who charge closer to 0.25%.
2. Schwab U.S. Dividend Equity ETF
The Schwab U.S. Dividend Equity ETF (SCHD 0.59%) has a similar focus on high-yielding U.S. stocks, but it differs from its Vanguard counterpart, mainly due to its focus on a few higher yielding stocks that are members of the Dow Dividend 100 Index.Its top holdings include Chevron and Verizon Communications, which both pay a yield of over 4%.
That focus means the ETF pays a higher overall yield of 3.5%. On the downside, you'll pay a little bit more to own Schwab U.S. Dividend Equity; the expense ratio is 0.06%.
As you might expect, this fund has underperformed the wider market in the past year during the tech-led rally. The ETF's shares are up 14% in the past 12 months compared to the S&P 500's 30% spike. Schwab U.S. Dividend Equity will likely outperform during market downturns, though, making it more of a defensive holding.
3. Vanguard Total Stock Market ETF
In exchange for a lower yield, you can get more diversification by owning the Vanguard Total Stock Market ETF (VTI 0.43%). This fund gives you exposure to essentially the entire market of U.S. stocks (large, mid, and small cap). You'll get a decent yield of 1.3% immediately, which matches the yield of the more focused S&P 500.
This ETF gives investors much more exposure to growth stocks, as evidenced by its top holdings, which include nearly all of the "Magnificent Seven" stocks. A retiree likely wouldn't want to allocate too much of their portfolio to this fund given that intense focus on growth as opposed to value.
However, as part of a diversified portfolio that includes dividend funds, bonds, and cash, Vanguard Total Stock Market can play the role of providing market-matching returns along with some (steadily rising) income.
