by Aaron Levitt | July 23, 2014 10:50 am
We all know just how important dividends are for creating long-lasting wealth and returns. However, for investors in or approaching retirement, the significance of dividends even grows further.
The steady income stream can help pay for life’s necessities and reduce the need for selling and withdrawing money from your portfolio. After all, getting 3% in dividends reduces the amount you need to pull from your accounts to meet your target withdrawal rate.
At the same time, stock dividends carry lucrative tax advantages and offer the ability beat inflation as companies raise their payouts. That’s something that the interest from bonds can’t do. And let’s not forget that dividend payments can help cushion downturns in stock market as well.
All in all, dividends can be the key to a happy and fruitful retirement. And using exchange-traded funds (ETFs) makes it even easier to add dividends to a retirement portfolio.
There are now several funds that specialize in paying dividends. Here are five of the best dividend ETFs that retirement investors may want to consider:
Part of BlackRock’s (BLK) newly launched core line of ETFs, the iShares Core High Dividend (HDV) makes a great first stop for retirement investors looking to add a dose of dividends.
HDV tracks the Morningstar Dividend Yield Focus Index, which is a measure of U.S. firms that pay above-average dividends. The ETF takes it one step further by using a screen to eliminate stocks without a significant economic moat, and it adds the requirement of having the potential to earn above-average returns on capital. That creates a portfolio of 75 different stocks. Top holdings in the ETF include stalwarts like AT&T (T) and Chevron (CVX).
That focus on quality and high dividends creates a dividend yield of 3% for HDV. Even better: This dividend ETF has managed to beat the S&P 500 in total returns since its inception.
What’s more HDV is a dirt-cheap option to own. After adding it to its core series of ETFs, iShares dropped the expense ratio down to just 0.12% — or $12 per $10,000 invested. That makes it a great and low-cost option for retirement investors looking to juice their portfolios with dividends.
The term “smart-beta” gets thrown around a lot these days as Wall Street begins to move beyond traditional indexing. Most of the funds in the category are kind of junky. However, the FlexShares Quality Dividend ETF (QDF) is one fund retirement investors may actually want to consider.
The heart of smart beta is using additional screens to create and index, and QDF is no different. The ETF first looks at firms with high yields, as well as strong payment- and dividend-growth histories. QDF applies screens to weed out potential problems. By looking at factors such as profitability and reliable cash flows, QDF attempts to rank its holdings based on dividend quality.
That quality of dividends is exactly how investors can profit.
QDF’s portfolio of 208 different dividend-paying equities can represent the “cream of the crop” when it comes to safety and dividend payouts. High-yielding stocks with “sketchy” financials — like Frontier Communications (FTR) — won’t be found in QDF. That means it’s perfect for retirement investors worried about where their yield is coming from.
Expenses run 0.38% annually for the ETF.
While an initial high yield can be great for retirement investors, a rising payout is even better. That’s because these rising dividend payouts can help keep the cold hand of inflation at bay. Over the longer term, inflation is one of the main deterrents to retirement.
Enter the Vanguard Dividend Appreciation Index ETF (VIG).
VIG tracks the NASDAQ US Dividend Achievers Select Index. That underlying index represents a portfolio of firms that have consistently raised their payouts over time. In fact, VIG’s 163 holdings have a juicy history of increasing dividends for at least ten consecutive years. The fund’s portfolio reads like a who’s who of American stalwarts — like Johnson & Johnson (JNJ) and PepsiCo. (PEP).
While VIG’s yield is only 1.91%, the name of the game here isn’t high income, but income that grows over time. That makes the fund an important tool for retirement investors looking to fight inflation. Pairing it with another ETF on this list for a bigger current yield could be the best strategy.
And since it’s a Vanguard fund, you know that costs of ownership are next to nothing. Expenses for VIG run a dirt-cheap 0.1%.
The bulk of investor’s attention in the dividend space tends to be on the largest firms. However, mid- and small-cap stocks can be big-time dividend payers, too. Retirement investors shouldn’t ignore them in their search for yield.
That’s why the WisdomTree Total Dividend ETF (DTD) might make a great play.
DTD focuses on dividend payers across the entire stock market, including mid- and small-cap firms. The fund holds roughly 960 different stocks in all. And like many of WisdomTree’s funds, DTD weights its constituents based on what dividends the firm is projected to pay in the coming upcoming year. That breadth of holdings produces a 2.5% dividend yield.
DTD has a bonus for retirement investors: It pays out its dividend monthly rather than quarterly. That means investors can use it better gauge their cash flows.
Expenses for DTD run just 0.28%.
When it comes to dividends, retirement investors shouldn’t forget about international firms. In fact, some of the juiciest dividends can be found overseas.
The SPDR S&P International Dividend ETF (DWX) allows investors to tap into that opportunity.
DWX tracks the 100 highest dividend-yielding common stocks and ADRs in the developed world outside of the United States. Australia, the United Kingdom and Canada round out the top three holdings. Overall, the fund is quite balanced in terms of international exposure. That wide range of firms helps DWX produce a hefty 5.2% dividend yield.
However, that yield could grow as foreign currencies fluctuate against the U.S. dollar. That would provide a nice boost to a retirement investor’s purchasing power over the long-term.
Expenses for DWX aren’t cheap at 0.45%, but it is one of the broadest and highest-yielding options for retirement investors looking at dividends.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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