Stop right there! Put that blue chip down! Don’t you know you can hurt by holding only individual stocks in your portfolio?
If your “defensive” blue-chip stock falls 20%, its 3% yield won’t be much consolation. That’s why I suggest retirement investors be particularly attuned to the concept of diversification. It’s your greatest defense against market declines, and you can accomplish it by investing in ETFs.
You may wonder how you can continue to generate yields with ETFs, but thankfully, the industry is well-aware of your need for dividend yield. So there are many choices for dividends and diversification with ETF choices. Because capital appreciation doesn’t mean you have to take on tons of risk.
Here are a few worth looking at, based on dividend yield and 5-year performance.
PowerShares High Yield Dividend Achievers (ETF) (PEY)
PowerShares High Yld. Dividend Achv(ETF) (NYSEARCA:PEY) has only slightly underperformed the S&P 500 while providing a 12-month yield of 3.2%. Even though it has closely tracked the S&P, it has done so over the past five years with a beta of only 0.72, meaning it is 28% less volatile than the index, which only offers a yield of 1.87%. The fund’s price-to-earnings ratio is only 18.4 vs. the index’s 18.7.
Don’t be fooled by the name. This isn’t an ETF with risky junk bonds. Its top holdings mostly consist of dividend aristocrats that have been raising dividends every year for decades, like Universal Corp (NYSE:UVV), AT&T Inc. (NYSE:T) and Old Republic International Corporation (NYSE:ORI).
WisdomTree SmallCap Dividend Fund (ETF) (DES)
Most retirement investors probably don’t delve into the small-cap arena much, considering it has the perception of being significantly riskier than blue chips. That’s not always the case. It depends on which small-cap stocks you are talking about and what a given ETF might hold.
The WisdomTree SmallCap Dividend Fund (ETF) (NYSEARCA:DES) is the top-performing small-cap dividend ETF of the past five years, with a 129% total return vs. the S&P’s 115%. It’s five-year beta is only 1.09, meaning it is only 9% more volatile than the S&P and, interestingly, has delivered better returns, so you are compensated for the slight additional risk.
But this ETF isn’t wildly overpriced, as you would expect many small-cap companies to be. Sure, there are plenty of growth stocks, but that isn’t the entire portfolio. Indeed, the top holdings of this ETF are skewed towards value stocks. That’s why the ETFs P/E ratio is 17, the same as the S&P’s. It has a 2.68% yield, also beating out the index.
First Trust Morningstar Dividend Leaders (ETF) (FDL)
I wouldn’t dare leave you without mentioning one blue-chip ETF. I didn’t mean to suggest that blue chips have no place in your portfolio. You need the comfort of the famous names, which brings us to the First Trust Morningstar Divid Ledr (ETF) (NYSEARCA:FDL).
What you gain in safety, you give up slightly in performance, with this ETF offering a 114% total return over the past five years, essentially matching the S&P. Safety is paramount, though, and in this case we’ve got an ETF with a beta of only 0.6, meaning its going to be only 60% as volatile as the index.
It’s also got safety on the pricing side, with an aggregate P/E ratio of only 16.8 compared to the S&P’s 18.7, and almost double the yield at 3.34%. Yes, you’ll be comfortable with top names like AT&T, Chevron Corporation (NYSE:CVX), and Pfizer, Inc. (NYSE:PFE).
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he did not hold a position in any of the aforementioned securities. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He is the Manager of the forthcoming Liberty Portfolio. He can be reached at TheLibertyPortfolio@gmail.com.
