Everyone should consider holding dividend stocks in their retirement portfolio, and exchange-traded funds (ETFs) offer one of the most efficient vehicles for those holdings. There are numerous ETFs that produce strong dividend income, so retirees have some options.
The three funds below each offer a slightly different spin on income investment and are suitable for different investor preferences and goals. Let's take a closer look at each one and why you might want to own it.
1. Schwab U.S. Dividend Equity ETF
The Schwab U.S. Dividend Equity ETF (SCHD -0.10%) is a popular and efficient vehicle for investors seeking straightforward exposure to stocks with high yields. The fund aims to track the Dow Jones U.S. Dividend 100 index.
It holds approximately 100 stocks with high dividend yields, and these holdings are based on payout consistency and financial ratios that indicate fundamental strength relative to peers. The portfolio excludes real estate investment trusts (REITs) and master limited partnerships (MLPs).
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As a result, the Schwab U.S. Dividend Equity ETF provides above-average yield without excessive risk. Its 3.7% dividend yield is strong relative to its peers and major market indexes. The fund's selection methodology also allows it to offer a low 0.06% expense ratio that won't erode long-term returns like some more-actively managed ETFs.
Investors should expect the ETF to deliver long-term returns that are consistent with value stocks. The fund's performance is less volatile than growth stock portfolios as a result, but it doesn't provide as much upside potential. That's an attractive trade-off for most retirees who are focused on capital preservation.
Investors should also recognize that the fund's selection criteria result in a relatively high concentration of stocks in the financial, healthcare, and consumer staples sectors. If your other investments are already highly concentrated in those sectors, then adding the Schwab U.S. Dividend Equity ETF might interfere with sector diversification across the overall portfolio.
2. Vanguard Dividend Appreciation ETF
The Vanguard Dividend Appreciation ETF (VIG 0.10%) provides a more specialized approach for income investors who still desire returns from share price appreciation. That might be attractive for early retirees who need growth to manage inflation risk for many years after they have stopped working. It can also be valuable for complementing a low-risk allocation across the rest of a portfolio.
The Vanguard Dividend Appreciation ETF tracks the S&P U.S. Dividend Growers Index. It applies screens to identify companies with a history of consistently increasing dividends, and its allocation weighting is based on market capitalization.
The fund holds more than 300 stocks, almost all of which are large caps. Like many other Vanguard ETFs, the Dividend Appreciation fund's passive approach and massive scale allow it to charge an exceptionally low 0.06% expense ratio.
Growth stocks tend not to pay dividends, so the fund isn't necessarily appropriate for pure growth investors. Its diversified holdings are still similar to most value stocks: The fund's 21.5 weighted average price-to-earnings ratio is significantly lower than you would expect to see from a group of disruptors with lofty valuations.
Instead, this allocation lies slightly further along the spectrum of risk and reward relative to other dividend-focused ETFs. With modestly higher exposure to technology stocks than most of its peers, the Vanguard Dividend Appreciation ETF offers a different flavor to achieve slightly different performance.
3. FlexShares Quality Dividend ETF
The FlexShares Quality Dividend ETF (QDF 0.38%) provides another layer of screening that might be attractive to investors who are prioritizing safety and reliability. The fund tracks a proprietary index that was created by Northern Trust Asset Management. That index reflects a factor-investing approach that ranks stocks on such qualities as management efficiency, profitability, and cash-flow reliability.
These quality screens result in a basket of stocks that are more likely to be well-run, self-sufficient, and predictable. The ETF holds index members that pay sufficiently high dividend yields, and its portfolio weighting reflects the quality score.
The FlexShares Quality Dividend ETF's methodology results in somewhat different performance from market-weighted peers, more passively managed funds, and dividend funds with an explicit focus on growth or yield. The fund's 138 holdings provide similar sector exposure as the other ETFs covered here, though it does skew somewhat heavier toward large-cap tech stocks and mid caps.
It's important to recognize that the proprietary screening results in a relatively high expense ratio at 0.37%. That leaves this fund with a higher hurdle to overcome than its low-cost peers. Its 2.2% dividend yield isn't necessarily enough to justify the extra cost on its own.
That means retirees are paying a premium for the apparent safety provided by its rules-based approach. The Quality Dividend ETF is best suited for risk-averse retirees who want investment income without the stress.
