Those of us who are approaching or entering retirement are likely thinking harder than ever about income. Social Security is great, but as of June, the average monthly retirement benefit was just $1,918 — about $23,000 for the year. Even if you collect twice that, it’s likely far less than you’d like as your total retirement income, so you should be working on amassing a hefty nest egg for retirement and thinking of how you might set up multiple income streams for your later years.
One excellent source of retirement income is dividends.
Image source: Getty Images.
Why dividends?
Dividends are terrific for multiple reasons. For example:
Healthy and growing dividend-paying stocks will tend to increase their payouts over time. So if one pays you, say, $1.50 per share today, it might be paying you $4.00 per share in 15 years.
Healthy and growing dividend-paying companies will likely have stock prices that appreciate at a good clip over time, so shareholders get rewarded by stock-price growth, dividend income, and dividend growth.
Having a significant portion of your portfolio devoted to dividend payers can generate more income than you might imagine. If, for example, you have $400,000 in such companies with an overall average dividend yield of 3%, you’re looking at $12,000 in annual income — about $1,000 per month, on average.
You can not only enjoy significant dividend income, but you won’t have to sell off any of your portfolio in order to receive it. Your portfolio will just keep receiving infusions of cash.
Retirees might use that cash for living expenses. If the dividends are in a pre-retirement portfolio, those dividends can be reinvested in additional shares of stock, which will then start delivering dividend payments of their own.
Are you starting to feel giddy about the power of dividends now? Great! Here’s one more tidbit to digest: Dividend-paying companies are not wimpy compromises you might invest in instead of growth stocks. They actually tend to perform well!
Check out the table below, adapted from a Hartford Funds report:
Dividend-Paying Status
Average Annual Total Return, 1973-2022
Dividend growers and initiators
10.24%
Dividend payers
9.18%
No change in dividend policy
6.60%
Dividend non-payers
(0.60%)
Dividend shrinkers and eliminators
3.95%
Data source: Ned Davis Research and Hartford Funds.
Dividend-focused ETFs are great retirement investments
So now that you’re revved up about dividend-paying stocks, should you rush out and buy some? Well, sure. If you’re comfortable studying and selecting individual stocks, go right ahead. But if you’re not, and even if you could, consider opting for ETFs (exchange-traded funds) — instead of or in addition to individual stocks.
Below are nine ETFs that offer income. The first eight focus on income, while the last is a simple S&P 500 index fund. It’s there for comparison purposes — and also because it’s a darn fine ETF for anyone to consider.
ETF
Recent Yield
5-Year Avg. Annual Return
10-Year Avg. Annual Return
iShares Preferred & Income Securities ETF (PFF -0.03%)
6.36%
2.29%
3.44%
SPDR Portfolio S&P 500 High Dividend ETF (SPYD 0.14%)
4.39%
7.59%
N/A
Schwab U.S. Dividend Equity ETF (SCHD -0.06%)
3.72%
12.48%
11.52%
iShares US Real Estate ETF (IYR 0.45%)
3.12%
3.89%
6.06%
Vanguard High Dividend Yield ETF (VYM 0.05%)
2.85%
10.24%
9.78%
SPDR S&P Dividend ETF (SDY)
2.41%
8.55%
9.85%
iShares Core Dividend Growth ETF (DGRO 0.17%)
2.38%
11.58%
11.83%
Vanguard Dividend Appreciation ETF (VIG 0.19%)
1.76%
11.63%
11.56%
Vanguard S&P 500 ETF (VOO 0.43%)
1.27%
14.34%
12.71%
Source: Morningstar.com, as of July 31, 2024.
The funds are ranked by dividend yield, and you might want to jump into the fund with the fattest yield, but hold on. You’ll see in the table that the ETFs with bigger yields tend to be somewhat slower growers than the ones with somewhat lower yields. So be sure to consider that factor. You might want to spread your dollars across several of the ETFs.
Note, too, that the numbers above shouldn’t be the only ones you look at. With any fund of interest, read up more on it. For example, you might want to learn how much each fund charges annually (its “expense ratio”) and how many different securities it holds:
ETF
Expense ratio
Recent number of holdings
iShares Preferred & Income Securities ETF
0.46%
439
SPDR S&P Dividend ETF
0.35%
136
iShares US Real Estate ETF
0.40%
75
Vanguard Dividend Appreciation ETF
0.06%
342
SPDR Portfolio S&P 500 High Dividend ETF
0.07%
78
Schwab U.S. Dividend Equity ETF
0.06%
103
Vanguard High Dividend Yield ETF
0.06%
556
iShares Core Dividend Growth ETF
0.08%
416
Vanguard S&P 500 ETF
0.03%
504
Here’s what the expense ratio tells you: If it’s, say, 0.03%, you’ll pay about $3 for the year on an investment of $10,000. If it’s 0.46%, you’ll pay $46. In general, the lower the fee, the better, though, of course, some funds are worth their higher fees.
The number of holdings might matter to you if you want to spread your money across lots of holdings or relatively few. Remember, though, that how a fund weights its holdings matters a lot. It’s common for a fund to be market-capitalization-weighted so that the biggest companies in it are the most influential. That means, conversely, that smaller companies won’t move the needle very much.
So, give dividend-focused ETFs some serious consideration for your portfolio. You might opt for one or more of the ones above — but know that there are other good ones out there, as well.
Selena Maranjian has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF, Vanguard Specialized Funds-Vanguard Dividend Appreciation ETF, and Vanguard Whitehall Funds-Vanguard High Dividend Yield ETF. The Motley Fool has a disclosure policy.
GIPHY App Key not set. Please check settings