3 Top Dividend Equity ETFs With 4% Yields Perfect For Retirement Income

High yield stocks with both sustainability and dividend growth characteristics can be found in this market.
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Government bond yields, and fixed income yields in general, are back on the rise, which is more than welcome news for investors who look to generate regular, predictable income from their portfolios. The 30-year Treasury yield, however, is still just a hair above 2% and that won't get anybody terribly excited.

It's especially tough for those in retirement. These are the folks that have saved for decades in anticipation of living off their portfolios only to find that they're retiring in a record low yield environment. The gains that have been experienced over the past several years have certainly softened the blow, but those who have a large portion of their portfolios in fixed income are probably still experiencing challenges.

Retirement Planning

Retirement Planning

Many investors have been pushing way out on the risk spectrum to boost their yields, but that's an especially dangerous choice in the current environment. Junk bond yields just fell below 4%, their lowest level ever, and represent a very poor risk/return profile. Investing in junk bonds right now just doesn't make a lot of sense given how much risk people would be taking in exchange for an historically low yield. And if yields remain on the rise, junk bond values are going to decline quickly.

That's left investors to test the equity market for dividend yield. The S&P 500 is only yielding about 1.5% right now, so it's not a real step up. There are higher yields in certain segments of the stock market, but investors need to be picky. Investing in a stock ETF that fills its portfolio based solely on dividend yield can be dangerous because these are the companies most prone to a downturn. You need to look for companies that pay dividends with sustainability characteristics and are backed by quality balance sheets.

These stocks, and the ETFs that target them, could be ideal choices for those in retirement looking to capture the upside of equities, but still earn a high yield in the meantime.

I've found three ETFs that I think fit the bill. They all target high yield U.S. stocks and come with current yields of at least 4%. All take various steps to either reduce risk through diversification or add a sustainability component to ensure dividend health.

Because they focus on more mature, cash rich companies, they tend to have a heavier value tilt. That hasn't been the type of portfolio the market has favored in recent years, but an economic recovery scenario, such as the one that many are expecting later this year as we move past the COVID pandemic, generally favors value and dividend stocks. If that comes to fruition, it could be a good time to consider adding the following ETFs to your portfolio.

If you're a retiree, this could be a comparatively better way to add a higher yield to your portfolio without venturing too far out on the risk spectrum.

Invesco High Yield Equity Dividend Achievers ETF (PEY)

PEY is essentially a high and dividend growth ETF rolled into one. It tracks the NASDAQ US Dividend Achievers 50 Index, which targets the highest yielders from a universe of stocks that have a long history of paying and growing their dividends.

In order to qualify, a stock must have at least ten consecutive years of increasing annual regular dividend payments. From there, it select the 50 components with the highest from that group and dividend yield weights them. Certain weighting caps are placed on individual names and sector, while REITs are excluded altogether.

Because it's considered an all-cap value fund (with similar weightings to large-, mid- and small-caps), it hasn't been able to keep up in this large-cap driven market. However, it scores quite highly within its Morningstar category, meaning it's been an above average performer within its peer group.

This is really one of those ETFs that provides the best of both worlds. Dividend achievers generally deliver predictable income growth, but aren't big on yield. The high yield focus within the dividend grower category allows investors to more than double their yield compared to a broad equity fund while maintaining a more conservative tilt.

PEY currently yields 4.2%.

ALPS Sector Dividend Dogs ETF (SDOG)

Many investors are aware of the dividend dogs strategy. The original version of it, typically known as the Dogs of the Dow, holds that investors target the 10 highest yielding stocks within the Dow and rebalance at the beginning of every year. The strategy was found to outperform the broader market since the tech bubble 20 years ago.

SDOG uses that strategy but applies it to the S&P 500. The underlying index targets the 5 highest yielding stocks within each of 10 major sectors (real estate is excluded). It allocates 10% of the portfolio to each of those 10 sectors and equal-weights the 5 names within each sector. Effectively, every one of the portfolio's 50 components receives a 2% weighting.

SDOG doesn't add a quality or sustainability screen to the portfolio but its equal-weighting methodology across both sectors and stocks helps diversify away a substantial portion of risk from any individual name impacting the fund negatively.

Not surprisingly, SDOG tilts heavily in the direction of large-cap value, a style which hasn't been in favor over the past few years, but has a solid long-term record of success. It currently yields 4.4%.

First Trust Morningstar Dividend Leaders Index ETF (FDL)

With $1.5 billion in assets, FDL is a little more under the radar, but that shouldn't take away from what it's done over time. The fund follows an index developed by Morningstar which targets the 100 highest yielding stocks across the entire U.S. stock universe with a positive 5-year dividend growth rate and a coverage ratio of greater than one. This is done to ensure that stocks are growing their dividends over time and have the income necessary to cover their dividend payments.

The one drawback I find with this fund is that its sustainability requirements are fairly loose. It doesn't require a consistent annual dividend increase, just that the dividend is higher over the past five years. For example, that could consist of no dividend increases for several years followed by a single increase in the 5th year. That makes FDL a little more of a pure high yield fund than a dividend growth fund. The coverage ratio is a little more standard as a quality measure and a good indication of dividend health. That should help eliminate a lot of the junk from making its way into this portfolio.

FDL has a current yield of 4.3%.

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