It's every retiree's dream to create a completely passive income stream from their portfolio to fund their retirement. It's not easy. Doing so requires careful planning, an understanding of your financial situation, and the right investments.
If you're searching for those right investments, Vanguard should be near the top of the list of places to consider. The fund giant offers several ultra-cheap, broadly diversified dividend ETFs that can produce a steady and reliable income stream whether you're in or near retirement.
Let's run down the Vanguard dividend ETF lineup, determining how to best fit them together.
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- The Vanguard Dividend Appreciation ETF (VIG 1.31%) is a fairly standard dividend growth fund. It targets U.S. companies with a 10-year-plus track record of annual dividend growth. It offers a current yield of about 1.6%.
- The Vanguard International Dividend Appreciation ETF (VIGI 1.20%) would be the foreign version of the fund above. It can invest in either developed or emerging markets, with the only major difference being that it requires a more modest seven-year dividend growth history. It currently pays 2.1%.
- The Vanguard High Dividend Yield ETF (VYM 1.03%) targets above-average yields but casts a wide net in doing so. It starts with a large-cap universe of U.S. stocks and includes those in the top 50% of yields. It has a current yield of 2.3%.
- The Vanguard International High Dividend Yield ETF (VYMI 1.70%) is the non-U.S. version of the fund above. It pretty much follows the same strategy and has a current yield of 3.4%.
- The Vanguard Wellington Dividend Growth Active ETF (VDIG 1.40%) is a newer fund in the Vanguard lineup. It actively selects stocks that focus on quality companies that demonstrate good value and the ability to grow their dividends over time. It has a current yield of about 1%.
NYSEMKT: VIG
Key Data Points
How Vanguard's dividend ETFs can work together
You can probably tell from the relatively low yields that Vanguard's dividend funds are run relatively conservatively. The high-yield funds do a good job of producing above-average yields without any excessive risk, although their strategies can be a bit too broad.
My one gripe with the dividend appreciation ETFs is that they're market cap-weighted. That simply brings the largest companies to the top of the portfolio regardless of dividend profile.
From a high level, however, all of these funds can work in a portfolio geared for retirement. Here are a few of my thoughts:
- Use the dividend-growth and high-yield ETFs together in an allocation that fits what you're looking for. Don't necessarily push too far toward the high-yield funds in the pursuit of more income. Owning both strategies can be beneficial.
- Don't be afraid to invest in the international ETFs. As we've seen over the past year or so, they can perform very well relative to the U.S. markets.
- Use the Wellington ETF as a satellite around the other ETFs, but only sparingly. It's still a little too new and I'd prefer a little history before committing further.
With that plan in mind, the roster of Vanguard dividend ETFs can help generate the diversified income to prepare you for retirement.
