Retirees have different goals, but there are a few universal common denominators. For example, all retirees like to receive steady and dependable income. What many retirees might not agree on, though, are the best ways to obtain that income.
One alternative that's highly popular these days is the Schwab U.S. Dividend Equity ETF (SCHD +0.78%). The average daily trading volume for this exchange-traded fund (ETF) is around 16 million shares. But is the Schwab US Dividend Equity ETF a good choice for retirees?
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The pros
Let's start with the reasons why this Schwab ETF is a smart pick for retirees. I'd put the strong dividend yield at the top of the list.
The Schwab U.S. Dividend Equity ETF currently pays a yield of 3.97%. The income such a juicy yield can produce might bring a smile to the faces of many retirees.
Even better, the fund has grown its dividend payout throughout the years. Since the Schwab U.S. Dividend Equity ETF's inception in October 2011, its dividend has increased by roughly 541%.
These positives are a direct result of the caliber of stocks in the ETF's portfolio. This Schwab ETF attempts to track the Dow Jones U.S. Dividend 100 index, which selects stocks of 100 U.S. companies with high dividend yields, track records of consistently paying dividends, and fundamental financial strength. Top holdings of the Schwab U.S. Dividend Equity ETF include Texas Instruments, Chevron, ConocoPhillips, Merck, and Cisco Systems.
The long-term performance of this ETF has been pretty good, too. Since its inception, the Schwab U.S. Dividend Equity ETF has delivered an average annual return of 12.33%. Over the last five years, the fund's average annual return was 12.88%.
NYSEMKT: SCHD
Key Data Points
Retirees should also like this ETF's low cost. The annual expense ratio of the Schwab U.S. Dividend Equity ETF is only 0.06%.
The cons
Are there some things about this Schwab ETF that aren't so good for retirees? Yep.
For example, some retirees probably won't be happy with the level of diversification the fund provides. Over 21% of the ETF's holdings are in the energy sector, which could be too much exposure to one sector for cautious income investors.
While the Schwab U.S. Dividend Equity ETF's returns have been good, they lag well behind the S&P 500's (^GSPC +1.20%) returns. Over the last five years, the S&P 500 has generated an average annual return of nearly 16.6% -- leaving the Schwab ETF's average return of 12.88% in the dust.
Some retirees might not be comfortable with the risk level of the Schwab U.S. Dividend Equity ETF. This fund can and sometimes does decline significantly. During its worst three-month period (from Dec. 31, 2019, through March 31, 2020), the ETF fell 21.55%.
Overall verdict: A good ETF for retirees
Is the Schwab U.S. Dividend Equity ETF a good pick for retirees? My overall verdict is yes.
This ETF provides solid and reliable dividend income. Its dividend growth in the past has more than offset the effects of inflation. Keep in mind, though, that there's no guarantee the fund will be able to increase its dividend as much in the future as it has in recent years.
Sure, this Schwab ETF hasn't performed as well as the S&P 500. However, for retirees more focused on income, that probably isn't a huge concern. I suspect that many retirees will be quite content with the average returns the fund has generated.
It's not wise to put all of your money in this ETF, though. Talk to a reputable financial advisor about diversifying your retirement portfolio. Still, the Schwab U.S. Dividend Equity ETF could be a great cornerstone investment for many retirees.
