Retirees face a very specific problem that most working investors don’t. They need their portfolios to support them. They need a combination of principal, capital gains, and income to support their lifestyle when regular retirement plan contributions aren’t going back in.
Social Security can cover some of the gap, but it was never really designed to be a full retirement program. Retirees need to come up with the rest. That’s where dividend exchange-traded funds (ETFs) can help.
Why high-yield dividend ETFs belong in a retirement portfolio
Retirement is the time of life when investors should be thinking more about principal protection than maximizing growth. That doesn’t mean that growth and tech stocks couldn’t and shouldn’t be in a portfolio. But it should only be in an allocation that doesn’t necessarily require you to alter your entire retirement plan should something happen.
Dividend ETFs hit the sweet spot in retirement portfolios. They’re fully invested in equities, which you still need in order to capture long-term growth. But they’re usually invested in more mature, defensive companies that can withstand multiple economic environments and mitigate some of the more extreme downside risks.
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The income, however, may be the most important component. In diversified portfolios, the regular income should be steady enough that it can play a big part in funding your monthly budget. The more income you’re able to rely on, the better the chances that you won’t outlive your money.
High-yield dividend ETFs can help with this, although they should be used in moderation. The yield may be high for reasons that are unsustainable and could signal a dividend cut. Most, however, are diversified enough and are filled with enough high-quality companies that any potential damage from a declining company should be rather limited.
With that in mind, here are three dividend ETFs that I really like. All yield more than 4% annually right now and could do a great job of helping to fund your retirement dreams.
SPDR Portfolio S&P 500 High Dividend ETF
The SPDR Portfolio S&P 500 High Dividend ETF (SPYD +1.02%) is perhaps the purest and most straightforward high-yield strategy there is. Its objective is to invest in the 80 highest-yielding stocks of the S&P 500 (^GSPC +0.37%) and weight them equally.
While this strategy produces a tantalizing 4.5% yield, it’s important to recognize some of the risks of investing in a pure high-yield ETF. Selecting stocks based on yield alone gives no consideration to the company’s balance sheet health, history of making dividend payments to shareholders, or even the ability to do so. High yields require large cash flows in order to pay them. One downturn could put that yield at risk.
Granted, these are S&P 500 companies, so the risk should be smaller. And it never hurts to have companies like these in your portfolio.
SPDR Portfolio S&P 500 High Dividend ETF
Today’s Change
(1.02%) $0.48
Current Price
$47.71
Key Data Points
Day’s Range
$47.38 – $47.79
52wk Range
$41.68 – $48.53
Volume
6.1M
Invesco S&P 500 High Dividend Low Volatility ETF
The Invesco S&P 500 High Dividend Low Volatility ETF (SPHD +0.54%) adds another screen to the universe of S&P 500 high-yielders. Similar to the SPDR Portfolio S&P 500 High Dividend ETF, this fund starts by identifying the 75 highest-yielding stocks within the index. But then it chooses only the 50 lowest-volatility securities from that subgroup for the final portfolio.
Not surprisingly, the two funds behave fairly similarly, and this fund’s 4.6% yield is equally enticing. Again, there’s no specific quality screen to act as a cross-check on yield sustainability here. But targeting only low-volatility stocks should mitigate some of the downside risk that comes from this group.
Invesco Exchange-Traded Fund Trust II – Invesco S&P 500 High Dividend Low Volatility ETF
Today’s Change
(0.54%) $0.27
Current Price
$50.45
Key Data Points
Day’s Range
$50.15 – $50.60
52wk Range
$46.58 – $53.07
Volume
642K
Invesco High Yield Equity Dividend Achievers ETF
The Invesco High Yield Equity Dividend Achievers ETF (PEY +1.72%) is a bit of a lesser-known dividend ETF that combines elements of high yield and dividend growth. Specifically, it considers only those companies with market caps of at least $1 billion and a minimum 10-year streak of annual dividend growth. From there, the selection process pulls out the 50 highest-yielding stocks and weights them by yield.
This ETF also focuses on yield, but the 10-year dividend growth requirement helps to ensure a commitment to growing that dividend over time. Once companies start doing that, they generally do what they need to in order to keep the dividend growth streak alive. That tends to ensure that these high yields can be maintained.
For retirees looking to boost their incomes, these ETFs all do the job. Picking stocks based solely on yield has its risks. But targeting large caps, low-volatility stocks, and/or those with lengthy dividend growth track records helps provide an additional level of sustainability that retired investors really need.