Why Dividend-Paying ETFs Work for Retirees

Why Dividend-Paying ETFs Work for Retirees

Cutting dividends is the last thing a high quality company wants.

Michelle.Lodge310x310
|
Reviewed by: Lisa Barr
,
Edited by: Ron Day

With mounting fears over having enough money to live on, seniors and those nearing retirement are feeling extra pressure to find ways to hold on to what they have. Fattening their nest egg is almost a secondary consideration.  

Enter exchange-traded funds that buy dividend-paying stocks and bonds. 

“Many people, especially retirees, like the income that dividend-paying ETFs throw off,” Ken Nuttall, CIO of Black Diamond Wealth in Wilmington, Delaware, told etf.com by email. “Dividend-paying companies also tend to be higher quality companies, and the last thing these companies will do is cut the dividend.”  

He added that such companies operate in a “defensive” mode to protect value, which benefits the investor. 

“As part of a diversified portfolio, dividend-paying ETFs make a lot of sense,” Lawrence Pon, a CFP and CPA in Redwood City, California, explained to etf.com in an email. “From a tax standpoint, they are very tax efficient because the dividends are mostly qualified dividends, so they are taxed at the more favorable capital gains tax rates.”  

The savings can be substantial. Depending on income, the tax rate could be zero, 15% or 20%, which is much lower than for ordinary investments, added Pon. “If you [have] a bond ETF paying the same amount of income, it will be taxed at the higher ordinary tax rate, which could be as high as 37%, whereas a dividend-paying ETF will mostly be taxed at the 15% rate.” 

The search for a better yield dovetails with the thoughts—and fears—of those in the retirement sphere. Not having enough money saved for retirement is a concern nearly one in two older adults have, according to a recent survey from SeniorLiving.org, in which one in four adults said they’re worried they can’t pay off their existing debt, while 45% and 39% of those between ages 55 and 64 and those over 65, respectively, lose sleep over how they will cover medical bills. 

“Higher dividend-paying ETFs can pay out as much as 2% to 3%, and that’s better than what we were getting in fixed income a few years ago,” Robin Giles, a CFP with Apex Wealth Management in Katy, Texas, revealed by email. 

She offers dividend-paying ETFs to clients because they can reap returns: “Now that interest rates are higher, fixed income has become more attractive, but there’s still a case to be made for dividend ETFs.”  

Marguerita Cheng, CFP and CEO at Blue Ocean Global Wealth, recommends a few funds. Stock funds include the Global X SuperDividend ETF (SDIV), the Vanguard High Dividend Yield ETF (VYM), the Vanguard Dividend Appreciation ETF (VIG) and the SPDR S&P Global Dividend ETF (WDIV).  

Among bonds, she suggests the iShares 10-20 Year Treasury Bond ETF (TLH), the iShares 7-10 Year Treasury Bond ETF (IEF), the Vanguard Short-Term Inflation-Protected Securities ETF (VTIP) and the AXS Astoria Inflation Sensitive ETF (PPI).  

Pon recommends the Schwab U.S. Dividend Equity ETF (SCHD), because “it is very low cost—0.06%. The current yield is 3.61%. Even with the market downturn, it is relatively stable.” 

“The dividend also allows investors to decide if they want to reinvest into that company or take the cash and do something else with it,” added Nuttall. 

 

Follow Michelle Lodge on Twitter @lodgemich 

Michelle Lodge is a journalist who is a contributor to many sites: Fortune, Money, Time, Barron’s, Investopedia, CNBC.com and Bloomberg.com.