Doing your taxes each year is hard work -- having recently finished mine, I should know. But planning for retirement can be much more difficult. Instead of getting your ducks in a row for just one year, you need all of your investments throughout your investing career to work together.
For most traders nearing retirement, equities that provide substantial dividend income without much volatility are pretty much the holy grail. Although exchange-traded funds haven't been around long, they could be just the safety net that retirees seek.
Below, I've highlighted three ETFs that could significantly add to your dividend income. In contrast, I left fixed-income ETFs out of this discussion, since many of them are highly sensitive to interest rates, and might take a big hit once those rates begin to rise.
Scotty, I need more power!
A solid retirement portfolio often begins with low-beta utility companies. Utilities usually offer a stable history of dividends and provide products that are almost always increasing in demand. But rather than looking at individual stocks, which could leave you more vulnerable to worldwide events, consider iShares Dow Jones US Utilities (NYSE: IDU) instead.
Shareholders of Entergy (NYSE: ETR), one of the largest owners of U.S. nuclear facilities, have recently felt the pinch from the tragedy in Japan. The iShares US Utilities ETF, however, has fared considerably better. The fund owns shares in 73 U.S. utility companies and currently yields around 3.5%. It also offers significantly less volatility than the overall market, with a beta of just 0.5.
Green-backed
Over the past few years, the mere mention of the financial sector was enough to give me heartburn. There is, however, a potentially smarter way to invest in this sector, which has historically provided healthy dividends to its shareholders: the PowerShares Financial Preferred ETF (NYSE: PGF).
This financial ETF provides ownership in a basket of financial companies that offer preferred shares. Why invest in preferred stock in the first place? Mainly because preferred stock offers first-in-line advantages for dividend payments that common shareholders simply don't get. Preferred shares have also outperformed bonds over the long haul. With a handsome yield close to 7% and a reasonable expense ratio of 0.65%, ownership in financials looks a whole lot prettier with this ETF.
One big basket
This last ETF may go a little overboard on diversification. That said, considering the market meltdown we witnessed just a few years ago, who couldn't afford to be more diversified?
The iShares Dow Jones Select Dividend ETF (NYSE: DVY) invests in 100 of the highest-yielding stocks, excluding real-estate companies, in the U.S. Dow Jones Index. The result is a highly diversified, low-beta (0.81) and high-yielding fund that could potentially give your portfolio some kick. The Select Dividend fund will have some overlap from the utility sector, but its 3.5% yield should keep investor complaints down to a minimum. Why bother investing in a broad-market fund, when you can essentially take the Dogs of the Dow strategy to new heights with this ETF?
Do you have a favorite ETF I've left off the list? Share your thoughts in the comments section below. Also, consider supercharging your retirement by adding iShares US Utilities, PowerShares Financial Preferred, iShares Select Dividend, and your own personalized portfolio of stocks to My Watchlist.
