When most investors begin planning for a steady income stream in retirement, they tend to gravitate toward fixed-income as a predominant asset class. There are two Vanguard ETFs that should be on every investor’s radar to supplement a retirement income.
The low volatility and reliable dividends from bonds offer an attractive combination for replacing career earnings. However, it’s important to remember that these assets can be susceptible to swings in price due to interest rate fluctuations and credit cycles.
To balance out that exposure, it’s imperative to maintain an allocation to dividend stocks with strong fundamentals.
In today’s markets, more established companies are focused on returning value to shareholders through dividends and share repurchase programs. As a result, S&P 500 Index companies are expected to pay out record-breaking dividend payments totaling more than $41 billion in November.
The diversification and low-cost of exchange-traded funds make them a perfect vehicle for accessing these dividend stocks with room to grow. Nonetheless, picking the right fund is imperative to a successful outcome.
The Vanguard High Dividend Yield ETF (VYM) and Vanguard Dividend Appreciation ETF (VIG) focus on dividend stocks, but these Vanguard ETFs have a unique twist that deserve a more in-depth explanation.
VYM tracks nearly 400 stocks with histories of paying consistently high dividends over time. This includes big names such as Procter & Gamble Co (PG) and Verizon Communications Inc. (VZ). The quality base of stocks that make up VYM have mature business models and produce consistent income to shareholders as a result of their proven methods.
Currently this ETF has a 30-day SEC yield of 2.9% and pays income on a quarterly basis. One of the most attractive qualities of this ETF as a core holding for retirement portfolios is its low expense ratio of just 0.1% annually.
VIG uses a separate screening methodology to hone in on stocks that are growing their dividends over time. Currently the portfolio is made up of 160 stocks with big names that include PepsiCo, Inc. (PEP) and Wal-Mart Stores, Inc (WMT). This ETF has more than $20 billion in total assets committed to stocks with attractive growth profiles and consistent cash flow models.
Currently VIG has a 30-day SEC yield of 2.01% and pays income on a quarterly basis as well. While the income from VIG is not exceptionally high, the long-term theme of selecting stocks with consistent dividend growth histories is a sound investment solution. This ETF also charges a similar expense ratio of 0.1% annually.
I like the combination of these two income-oriented Vanguard ETFs to support a retirement income because they have differing holdings that provide a wide coverage of the dividend stock universe. From a performance standpoint, VYM has had a significant level of relative strength this year with a gain of 14% versus 8.4% for VIG.
Ultimately the variable styles of these two Vanguard ETFs will continue to work in harmony as consistent retirement income producers and provide positive correlation to the stock market for those that need it. The key is balancing out your allocations with a multi-sleeved approach to reduce volatility, enhance your returns and reduce your risk of overexposure to any single asset class.
David Fabian is Managing Partner and Chief Operations Officer of FMD Capital Management. As of this writing, he was long VIG and VYM. Learn More: Why I love ETFs, And You Should Too.
