SPDR S&P Dividend ETF (SDY) for capturing dividend growers.
SDY invests only in a select group of companies from the S&P 1500 universe that have grown dividends for at least 20 years. The securities are then yield-weighted. The fund, with $16.2 billion in total assets, has a current distribution yield of 4.71%, according to FactSet data. It costs 0.35% in expense ratio.
Vanguard International High Dividend Yield ETF (VYMI) for a higher yield as opposed to total return out of your international equity allocation.
VYMI is a global ex-U.S. dividend strategy that ranks companies by forecast yield over the next 12 months, investing in those expected to deliver high yields relative to the average. Securities are weighted by market capitalization. VYMI has $968 million in total assets and costs 0.32%. Current distribution yield is 3.70%, FactSet data show.
First Trust North American Energy Infrastructure Fund (EMLP) for its blend of utilities and master limited partnerships (MLPs) as part of an income strategy.
EMLP is an actively managed MLP strategy that reaches beyond MLPs and into utilities and pipelines to meet 1940 Act rules. The strategy, with $2.3 billion in total assets, has a current distribution yield of 3.8%. It costs 0.95% in expense ratio.
Invesco CEF Income Composite ETF (PCEF) for a good proxy for closed-end funds, which, unlike ETFs, often trade at premiums or discounts since they’re closed for new creations.
PCEF invests in different types of CEFs focused on yield. The strategy looks for CEFs trading at a discount in order to capture value appreciation and higher yields. Current distribution yield sits at 7.17%. PCEF has $726 million in total assets and costs 2.07%.
Vanguard Real Estate ETF (VNQ) for diversification on the income side through REITs.
Securities like REITs can have strong appeal relative to traditional bonds in a rising rate environment. VNQ is a classic in the U.S. REIT segment, boasting $33 billion in total assets and a low price tag of 0.12%. Distribution yield currently is 4.25%.
New Way Of Thinking
“You have to train yourself to think about your money in a very different way,” Reiner said. “It’s a scary time when you go from adding and growing to taking money out of it and having to sustain it. But the questions are: How can I get a consistent amount of income out of my assets? And how can I build a portfolio that does that automatically without dependence on success of the market?”
The pitch for an income focus is hardly unique when it comes to investment advice for retirees. But different advisors and strategies offer different takes on the same quest for sustainable income.
John Thomas, chief investment officer of Global Wealth Management, works with a big retiree clientele in Ft. Lauderdale, Florida, and he says growing income comes with a warning.
Yes, focus first on generating income through securities such as dividend-paying stocks that are growing dividends, but keep an eye on valuations and capital preservation.
“You want to make sure you’re getting a raise and keeping up with inflation in your dividend payers,” Thomas said. “But you can’t have all investments in dividend growth, because then, all of a sudden, you have perhaps too much growth and not enough value in the portfolio.”
To that end, he says ETFs that achieve annual income growth but also keep the asset allocation balanced between growth and value—as some dividend payers are “pricey right now”—include:
iShares Core Dividend Growth ETF (DGRO) for steady, sustainable increase in income.
DGRO picks stocks based on dividend, dividend growth and payout ratio, looking for companies that have been consistently increasing dividends for at least five years, but that do it at a sustainable rate. The fund, with $4.3 billion in total assets, is cheap, at 0.08% in expense ratio. Current distribution yield is 2%.
Vanguard High Dividend Yield ETF (VYM) for high-yielding stocks.
VYM is a market-cap-weighted mix of dividend-paying stocks ranked by their dividend forecast for the next 12 months. The $22 billion ETF has been around since 2006, and costs only 0.08%. Distribution yield currently sits at 2.8%.
iShares Select Dividend ETF (DVY) as another alternative in the high-yield space.
DVY is a dividend-weighted basket of U.S. companies delivering sustainable income. The strategy looks for dividend growth, as well as payout ratio and history to find stocks that are paying high dividends and can keep doing so sustainably. With $17.4 billion in total assets, DVY costs 0.39% and currently delivers a distribution yield of 3.06%.