In this low interest rate environment, retirees need to put together a portfolio with diversified sources of income without taking too much risk to achieve it. Corporate bonds, REITs and Treasuries all make good options, but some traditional equity exposure offers the growth and income that's also needed.
Fortunately, the ETF marketplace is loaded with high quality choices focused on what I call the three pillars of dividend investing - dividend growth, dividend quality and high yield. Each of these individually provides an important component to income generation, but collectively they diversify away risk while expanding the dividend yield.
Dividend equities have largely been out of favor in 2020 as several companies continue to cut and suspend their quarterly payment in light of the COVID outbreak. That's sent many investors fleeing into Treasuries, despite their ultra-low yields, for safety.
Now that investors are focused almost entirely on the economic recovery and are acting like the bottom is in, dividend stocks are back in vogue. Yields are still looking a little iffy in some spots, but the overall risk/reward profile here has definitely improved.
I want to focus today on five of my favorite dividend ETFs that are perfect for retirement (or non-retirement) portfolios. There's at least one that focuses on each of the three pillars I mentioned earlier. All are low cost, solid performing dividend funds that come from high quality issuers.
Schwab U.S. Dividend Equity ETF (SCHD)
SCHD is perhaps my favorite dividend ETF because it actually hits on all three of the pillars.
Qualifying stocks must have a minimum 10-year dividend growth history, meet several quality criteria, including strong cash flows, low debt and high return on equity, and have an above average yield.
Its 3.5% yield is one of the best you'll find without straying too far out on the risk spectrum. It's about 25% cheaper than the broader market and comes with below average risk.
Top holdings include Home Depot, ExxonMobil, Intel and Bristol Myers Squibb.
Vanguard Dividend Appreciation ETF (VIG)
One of the largest ETFs around, VIG focuses entirely on the universe of dividend achievers, companies that have a 10+ year track record of consecutive annual dividend increases.
Qualifying components are market cap-weighted giving the portfolio a mega-cap tilt. The exclusion of REITs limits some of the fund's yield potential but also reduces a modest source of volatility as well.
Top holdings include Microsoft, Walmart, Procter & Gamble and Visa.
iShares Core Dividend Growth ETF (DGRO)
DGRO is another dividend ETF focused on dividend growers, but layers on a quality component to reduce the presence of higher risk names.
The fund's requirement of only a modest 5-year dividend growth streak casts an unusually wide net, but it also looks for lower payout ratios in order to introduce a dividend sustainability component. The exclusion of the top decile of dividend yields eliminates the risk of including companies with artificially high yields that could be the result of recent price declines or could indicate high risk of a dividend cut. The fund's dividend dollars-weighted strategy gives greater weighting to those companies that pay the greatest dividends.
Top holdings include Microsoft, Apple, JPMorgan Chase and Chevron.
Vanguard High Dividend Yield ETF (VYM)
As the name suggests, VYM is more of a pure high yield play. It target stocks based on a 12-month forward dividend yield forecast.
Like VIG, REITs are excluded. Because the fund's only real criteria is high yield, it does put it at risk of including lower quality components in the portfolio. We saw some of this recently with the long list of companies suddenly needing to trim or eliminate their dividends. VYM owns nearly 400 different stocks, which helps reduce the impact of any one dividend cut.
Top holdings include Johnson & Johnson, JPMorgan Chase, Procter & Gamble and Intel.
WisdomTree U.S. Quality Dividend Growth ETF (DGRW)
DGRO looks for a combination of dividend growth and quality factors.
The fund targets companies based on long-term earnings growth expectations and historical averages for return on equity and return on assets. Qualifying components are dividend-weighted in a manner similar to DGRO.
Top holdings include Verizon, Apple, Microsoft and Procter & Gamble.
More ETF Research
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