Conventional best friends meet you for golf games or lunch dates. Financial best friends serve a different purpose. In retirement, your financial besties can bring you rising income to combat inflation -- without excessive volatility in value.
Here's a look at three dividend exchange-traded funds (ETFs) that could step into that role for you, supporting your solvency for the rest of your days.
Dividend ETFs for retirees
|
ETF Name |
Dividend Yield |
Net Assets |
Expense Ratio |
|---|---|---|---|
|
iShares Core Dividend Growth ETF (DGRO +0.53%) |
2.11% |
$22.3 billion |
0.08% |
|
Schwab U.S. Dividend Equity ETF (SCHD +0.91%)
|
2.98% |
$33.9 billion |
0.06 % |
|
SPDR S&P Dividend ETF (SDY +0.51%) |
2.75% |
$20.3 billion |
0.35 % |
Table data source: iShares, Schwab, SSGA.
There are two important characteristics shared by these ETFs. First, they all screen companies for dividend consistency -- an important consideration if you're relying on the fund for retirement income.
Second, all three funds hold large-, mid-, and small-cap companies. Including medium-sized and smaller companies can support higher growth potential, but that comes with higher risk. The risk is that the value of these funds could be more volatile, versus a portfolio that only includes large caps. On the flip side, if you're holding an ETF long term for the income, dividend consistency may be your priority over share-price consistency.
iShares Core Dividend Growth ETF
NYSEMKT: DGRO
Key Data Points
The iShares fund tracks the Morningstar US Dividend Growth Index. The index uses three main screens to identify companies with rising but sustainable dividends:
- Companies with the highest dividend yields are excluded. A company's dividend yield could be higher than peers because its stock price is falling. A falling stock price, in turn, can reflect a negative change in company performance -- which could eventually affect the dividend policy.
- Only companies with five consecutive years of dividend growth are included.
- Companies with payout ratios of 75% or higher are excluded. The payout ratio is the percentage of earnings used for the dividend. Since a company can't absorb a very high payout ratio indefinitely, the payout ratio is an indicator of dividend sustainability.
The iShares ETF holds 418 stocks with concentrations in financials, technology, and healthcare.
Image source: Getty Images.
Schwab U.S. Dividend Equity ETF
Schwab's dividend ETF tracks a different index, the Dow Jones U.S. Dividend 100. Like the Morningstar index described above, this index includes some smaller companies. But there's a minimum float-adjusted market cap of $500 million. Index constituents must also have a history of paying dividends consistently for 10 years or more.
From that group, companies are selected for the index based on these four financial ratios:
- Cash flow to total debt
- Return on equity
- Dividend yield
- Five-year dividend growth rate
The Schwab ETF holds 109 stocks in total. More than 40% of those stocks are either financial or technology companies.
SPDR S&P Dividend ETF (SDY)
SPDR S&P Dividend ETF tracks the S&P High Yield Dividend Aristocrats Index. Dividend Aristocrats are usually defined as having increased their dividends for 25 consecutive years or more. This index, however, includes the highest-yielding companies in the S&P Composite 1500 that have raised their dividend for 20 years or more. Companies are selected for the strength of their dividend, along with potential for capital appreciation.
The S&P Composite 1500 consists of the S&P large-, mid-, and small-cap indexes combined -- specifically, the S&P 500, S&P 400, and S&P 600.
The SPDR ETF holds 119 stocks, with a concentration in financials, industrials, consumer staples, and utilities.
Dividends for retirement income
Dividends are never guaranteed, but they can be safe enough to function as one source of passive income in retirement. Diversified dividend ETFs are a nice option because the right funds have screens in place to keep riskier stocks out of their portfolios.
That's research and analysis you don't have to do. This is great because in retirement, you have more important tasks on your plate -- like playing golf and lunching with friends.
