Because Dividend ETFs Make Retirement Income Easy
Today let’s review what I think are some of the best dividend ETFs for retirement income. Then discuss how one or more of them can be worked into your retirement income portfolio.
Let’s get started…
Best Dividend ETFs For Retirement Portfolios
Here’s my list of ETFs that provide solid dividend income for retirement:
- SPDR Portfolio S&P 500 High Dividend ETF (SPYD)
- Vanguard Dividend Appreciation ETF (VIG)
- Vanguard International High Dividend Yield ETF (VYMI)
- iShares Preferred and Income Securities ETF (PFF)
- The Real Estate Select Sector SPDR Fund (XLRE)
First, allow me to say there are lots of good exchange-traded funds paying dividends to choose from. So, it was hard to narrow this list down to just 5.
But, I did it.
Partly based on my experience with these funds. Because I own 3 of them.
Plus, I hold many of the individual dividend stocks for retirement. Being held in another ETF we will discuss today. As a result, I will disclose my interest in each fund as we go.
With that said, let’s keep moving with a brief overview of each of these index funds…
Disclosure: At no cost to you, I may get commissions for purchases made through links in this post.
Then when you are done. But before you go. Be sure to read our post…
Dividends for Retirement Complete Planning Guide
Otherwise, back to today’s article…
SPDR Portfolio S&P 500 High Dividend ETF (SPYD)
As the name implies, this ETF invests in the 80 highest dividend-yielding companies that are part of the S&P 500 stock index.
SPYD Top Holdings
A sampling of some of the fund’s top holdings include:
- Exxon Mobile (XOM)
- Bristol-Myers Squibb (BMY)
- Iron Mountain Inc. (IRM)
- American Electric Power Company (AEP)
- International Business Machines (IBM)
One of the specific things I like about this fund is its sector diversification. Including equally strong representation in these types of businesses:
- Utilities
- Energy
- Financials
- Real estate
- Consumer staples
- Health care
SPYD Dividend Profile
If you look for price pullbacks, it’s not uncommon to get nearly a 4% dividend yield investing in this ETF. However, it has not offered a lot of dividend growth in recent years.
I suspect this is because the fund consistently shuffles its holdings. To stay invested in the 80 highest dividend yielders in the S&P 500.
SPYD Expense Ratio
This is a super-inexpensive fund. Charging just a .07% expense ratio.
That means for every $1,000 you have invested. The fee will only be 70 cents per year.
Disclosure Of Ownership Interest
I recently initiated a position in this fund. I did so when the stock market was nearing bear market territory. To grab the 4% dividend yield the ETF was offering at the time.
Another ETF similar to SPYD is the Vanguard High Dividend Yield ETF (VYM).
With VYM, in my opinion, you sacrifice some current dividend yield. Versus SPYD. In exchange for better dividend growth into the future.
VYM didn’t make today’s list of the best dividend funds for retirement portfolios. Not that I don’t like it. Just because I wanted a fund that offered a higher yield.
Speaking of Vanguard ETFs paying dividends. The next two funds on our list hale from that well-known investment company.
Vanguard Dividend Appreciation ETF (VIG)
This fund invests in lower dividend yield stocks that increase their dividends consistently. Also called dividend growth stocks. And sometimes referred to as Dividend Aristocrats.
Potential stocks for investment in the portfolio have increased their dividend rate per share every year for at least 10 consecutive years.
Then once that population of stocks has been identified. The top 25% of highest-yielding stocks are removed.
VIG Top Holdings
The fund usually fluctuates between 250 to 300 individual stocks. So, investing in VIG provides for plenty of diversification.
A sampling out of the fund’s top 20 holdings includes:
- Microsoft (MSFT)
- Johnson & Johnson (JNJ)
- Procter & Gamble (PG)
- PepsiCo (PEP)
- Abbott Labs (ABT)
Plus many more. In my opinion, it’s loaded with large-cap blue-chip stocks.
VIG Dividend Profile
What you get with this fund is a lower dividend yield. Since it usually hovers between 1.5 and 2%.
On the other hand, dividend growth is quite good. Averaging roughly 8 to 9% annually over time.
VIG Expense Ratio
Vanguard is known for its low investment fees. And VIG’s costs are no different at just .06%.
Disclosure Of Ownership Interest
I do not own this fund. Not because I do not think it is a good one.
Mainly since I individually own many of the stocks it holds. Specifically, 5 of the top 10. And 9 out of the fund’s top 20 stocks as of the time of this article.
So, I see no need to buy VIG. Owning it would bring unnecessary duplication to my retirement income portfolio.
Okay. Let’s move on to another Vanguard ETF…
Vanguard International High Dividend Yield ETF (VYMI)
As we continue our review of the best dividend ETFs for retirement portfolios.
Most financial advisors (which I’m not by the way – just an avid do-it-yourself investor) recommend an allocation to international stocks. And that’s where the VYMI fund offered by Vanguard comes into play.
So, this fund focuses on non-U.S.-based stocks. But only those that have above-average dividend yields.
VYMI Top Holdings
A selection of some of the fund’s top holdings include:
- Toyota Motor Corp.
- Shell (SHEL)
- Royal Bank of Canada (RY)
- British American Tobacco (BATS)
- Enbridge (ENB)
One of the specific things I like about this fund is its geographic diversification. Including strong representation across:
- Europe
- Asia
- Emerging markets
- North America (non-U.S.)
VYMI Dividend Profile
The fund has a nice dividend yield. Usually running between 4% to 5%.
International stocks handle dividend increases differently than their more predictable U.S.-based counterparts. So, it’s challenging to project how much future dividend growth the fund will deliver.
But, if I had to hazard a guess, I would say 3-5% annual dividend growth over the long run. That seems like a reasonable estimate to me.
VYMI Expense Ratio
Generally, you pay a little more in fees for international investing. But, VYMI’s fees still seem reasonable. Coming in with a .22% expense ratio.
That means for every $1,000 you have invested. The fee will be $2.20 per year.
Disclosure Of Ownership Interest
I own VYMI. Mainly because I want my dividend ETFs for retirement to have an international component.
However, I do not want to spend the time and effort analyzing, selecting, and buying individual international dividend stocks. That’s too much work for me.
So, I choose to invest in VYMI.
As I stated in the sub-title of this article, “dividend ETFs make retirement income easy”. At least they do for me. As it relates to investing in international dividend-paying stocks.
Okay. Now for something completely different. But yet another one of the best income ETFs for retirees…
iShares Preferred and Income Securities ETF (PFF)
The fund name should give you a clue. Because we are talking about preferred stocks now.
Versus their more popular counterpart, common stocks. Which most dividend ETFs hold.
First of all, preferred stock is a hybrid security. They have a mix of bond and common stock characteristics.
While an investor doesn’t have the capital appreciation potential like common stock. In return, preferred stocks usually offer significantly higher dividend yields.
PFF Top Holdings
First of all, the fund has nearly 500 holdings. So, it is very diversified.
Some of the top issuers that it holds include:
- Broadcom
- Wells Fargo
- Bank of America
- NextEra Energy
- Southern Company
Industry exposure is fairly typical. As issuance of preferred stock is mostly dominated by:
- Financial institutions
- Industrial companies
- Utilities
PFF Dividend Profile
The fund typically has a dividend yield between 5 and 6%.
But watch out, the share price can decline significantly in reaction to certain events.
Specifically, periods of rising interest rates. Also during times of economic stress when the financial markets are under pressure.
Of course, these can be the best situations to invest money. For getting the higher yields that come from lower share prices.
Regardless, I wouldn’t overweight this position. Not when I’m building a retirement portfolio for dividends.
Finally, PFF is the only one of the 5 dividend index funds for retirement on today’s list. That pays dividends monthly.
PFF Expense Ratio
Similar to international funds, specialty funds like PFF generally carry higher expense ratios. At the time of this writing, it was .46%.
Disclosure Of Ownership Interest
Yes. I own PFF. Both for the high income and the diversification the fund provides.
But it’s a different type of diversification. I call it diversifying up and down a business’s capital structure. But that’s a story for another day!
But PFF is just a small portion of my allocation to ETFs for retirement income.
Okay. Last but not least.
The fifth fund on today’s list of the best dividend ETFs for funding retirement income is a sector fund…
The Real Estate Select Sector SPDR Fund (XLRE)
And the sector is real estate. Represented by XLRE, a fund investing in publicly traded real estate investment trusts (REITs).
First of all, a REIT is a company that owns, bankrolls, or manages income-generating real estate.
In the most simple terms, REITS collect rents from their tenants. And, after operating expenses, distribute their earnings to shareholders as dividend income.
XLRE Top Holdings
The fund targets REITs that are part of the S&P 500 stock index. So it is fairly concentrated with only about 30 stocks in total.
Some of the holdings in the fund include:
- American Tower Corporation (AMT)
- Public Storage (PSA)
- Prologis (PLD)
- Realty Income (O)
- Ventas (VTR)
XLRE Dividend Profile
XLRE will generally yield between 3 and 4%.
Furthermore, REITs will typically increase their dividends over time. But generally, they are not rapid dividend growers.
XLRE Expense Ratio
Finally, annual expenses check in low. At just .1% annually of your asset value.
Disclosure Of Ownership Interest
I do not own XLRE. Furthermore, outside of investing in Realty Income (O), I do not have a large exposure to REITs.
If I wanted more, XLRE would be one of the first investments I would look to.
Next, and before I wrap this up. I want to briefly discuss how one or more of these ETFs can be worked into your retirement income portfolio.
Building A Dividend ETF Retirement Portfolio
Here’s how I like to look at dividend portfolio-building for retirement. Whether you are doing it with the best dividend funds for retirement or individual stocks.
First, it starts with an investment strategy. Which is nothing more than a defined approach to investing. That helps guide your investment decisions.
Here are 3 good dividend retirement strategies to consider:
- High dividend growth and dividend reinvestment
- High dividend yield and dividend harvest
- Balanced growth and dividend income
Let’s briefly touch on each one and how today’s best ETFs for retirement income fit within them.
But realize there are no exact right or wrong answers on asset allocation. Because everyone’s situation and risk tolerance are different.
High Dividend Growth And Dividend Reinvestment
This strategy emphasizes finding the best dividend stocks with rapid and sustainable growth potential. Perfect for an investor who is working and building for retirement in the future.
As a result, this type of individual doesn’t currently need the dividend income.
So, they can sacrifice some dividend yield today. In exchange for dividend growth in the future.
Also, reinvest all the dividends. Right back into their retirement portfolio.
For this approach, I suggest allocating the bulk of your retirement savings to the Vanguard Dividend Appreciation ETF (VIG).
Also, consider a smaller allocation, maybe 20-30% to the Vanguard International High Dividend Yield ETF (VYMI).
High Dividend Yield And Dividend Harvest
This dividend retirement investment strategy emphasizes stocks with higher dividend yields.
A good fit for someone that needs enough dividends to retire now or very soon. To pay for living expenses.
In this case, choose the SPDR Portfolio S&P 500 High Dividend ETF (SPYD) as a core holding. Then add smaller allocations to VYMI and PFF.
Balanced Growth And Dividend Income
Finally, balancing growth and income seeks to find the middle ground between the first two strategies just described.
The allocation options for this strategy are many. Depending on which side of the dividend growth vs dividend income spectrum you desire to emphasize.
But for example purposes, this combination of dividend ETFs for retirement may satisfy this strategy:
- VIG – 60%
- VYMI – 20%
- PFF – 10%
- XLRE – 10%
Just a suggestion.
Ultimately, you have to choose your dividend ETFs for retirement. And how much to allocate to each one. Depending on exactly what you are trying to accomplish.
After all. It’s your money!
Okay, that’s about it for today.
So, allow me to wrap up with a few parting thoughts.
Best Dividend ETFs For Retirement Portfolios
Retiring on dividend income is possible.
But you need to make the right investments. Consistent with a solid investment strategy to make it happen.
Furthermore, I can’t make a call on what is the best dividend ETF for retirement income.
Because it depends on you as the individual investor. And your specific investment strategy that is best to cover your expenses with dividends.
Nevertheless, today we discussed several of the best dividend ETFs for retirement income. They were:
- SPDR Portfolio S&P 500 High Dividend ETF (SPYD)
- Vanguard Dividend Appreciation ETF (VIG)
- Vanguard International High Dividend Yield ETF (VYMI)
- iShares Preferred and Income Securities ETF (PFF)
- The Real Estate Select Sector SPDR Fund (XLRE)
And I closed with a few suggestions regarding asset allocation to one or more of these funds. Depending on what dividend retirement strategy you choose to pursue.
Finally, dividend index funds for retirement are great investment options. For supplementing or fully funding your retirement income needs.
Especially for anyone not interested in picking individual stocks. And managing a dividend stock portfolio.
Since 2 to 4 funds are all you need for a well-rounded dividend stock retirement portfolio.
To emphasize what I said earlier: dividend ETFs make investing for retirement income easy.
Thanks for reading. And before you go, check out our…
Growing Archives of Dividend Investing Articles
Author Bio: Tom Scott founded the consulting and coaching firm Dividends Diversify, LLC. He leverages his expertise and decades of experience in goal setting, relocation assistance, and investing for long-term wealth to help clients reach their full potential.