Ask people what they're invested in right now to save for retirement, and most of them will probably say: The S&P 500, the Nasdaq-100, tech stocks, or the Magnificent Seven. All of those are easily defensible choices, but a well-rounded retirement portfolio should consist of more than just that.
Dividend exchange-traded funds (ETFs) haven't been in favor for some time leading up to 2026. The rotation away from just tech leadership has opened up opportunities for dividend payers. On the surface, these stocks won't be as exciting as the artificial intelligence (AI) stocks dominating the narrative. But their combination of steady long-term growth and predictable income make them an underrated piece of the retirement puzzle.
Image source: Getty Images.
Key takeaways
- Dividend ETFs build wealth in two ways: Share price growth and dividend income. Combined, these two return sources can compound significantly over long holding periods.
- Regardless of where you are in the retirement saving cycle, dividend ETFs complement portfolios heavily invested in tech stocks and the S&P 500 very well.
- Since 1940, dividends have accounted for 34% of the S&P 500's total return, although that's been considerably lower in recent decades.
- These three dividend ETFs consider balance sheet quality, yield, and dividend growth.
Why dividend ETFs could make you a retirement millionaire
While the market's focus has largely been on tech and growth stocks over the past two decades, dividends have traditionally made up a significant portion of the S&P 500's total return over time. Since 1940, approximately one-third of the index's return has been from dividends.
For retirement savers and those living in retirement, it doesn't just offer a different source of returns. It could provide an element of risk reduction. Dividend payers are traditionally more conservative, mature companies that have the financial means to weather a number of different economic environments.
As we saw in 2022, dividend stocks and ETFs held up very well when tech and growth stocks were plummeting. From a standpoint of principal preservation, dividend ETFs provide a nice risk-and-return complement to broader market stocks.
Three dividend ETFs to consider
There are over 150 U.S. and international dividend ETFs to consider. Most of them will do a reasonable job of getting you to the retirement finish line. But there are three that I feel are standout choices:
- Schwab U.S. Dividend Equity ETF (SCHD +0.40%)
- iShares Core High Dividend ETF (HDV +0.90%)
- WisdomTree U.S. Quality Dividend Growth ETF (DGRW +0.02%)
The thing I like about these ETFs is that they all have some type of quality screening built in. They're not just investing in high-yield or dividend growth stocks. They're targeting companies with the financial health to sustain those dividend payments well into the future.
NYSEMKT: SCHD
Key Data Points
The Schwab U.S. Dividend Growth ETF looks for dividend growth and high yield in the companies it invests in. The iShares Core High Dividend ETF looks for high yielders within a universe meeting quality criteria set out by Morningstar. The WisdomTree U.S. Quality Dividend Growth ETF is more of a traditional fund targeting forward-looking dividend growth potential.
For dividend stocks, slow and steady is the theme. Save consistently and for long enough, and they could make you a millionaire.
