Dividend ETFs can be a great way to earn some extra income. Retired investors are often looking for dividends, and dividend ETFs offer an extra degree of safety because of their diversification.
Today, retired investors have a lot to choose from. Although rates are rising and it appears that bond yields may get back on track in the next year or two, dividend ETFs and stocks offer the possibility of higher rewards.
The financial, energy, utility and communications sectors are the most likely stocks to pay dividends. But the goal when purchasing dividend ETFs is to buy ones that are not too heavily weighted in one area.
Since you want regular cash flow from the holdings in dividend ETFs, too many companies with suspect earnings should be avoided.
With all this in mind, I have compiled a list of the top 3 dividend ETFs for retired investors:
Dividend ETFs for Retired Investors: WisdomTree US MidCap Dividend (DON)
Expense Ratio: 0.38%
WisdomTree US MidCap Dividend ETF (NYSEARCA:DON) is not an obvious choice, but mid-cap stocks have something that large-cap stocks don’t have — a lot of room to grow earnings. A company with a $100 billion market cap is not going to have as much space to grow as a $20 billion company.
If the former grew to a $500 billion market-cap company, that’s a 5-fold return on your investment. But if a $20 billion company grows to $500 billion, that’s a 25-fold return on your investment.
The yield isn’t spectacular at 2.18%, but I mention DON because of the mid-cap angle and the possibility of capital gains over time. Indeed, DON has returned 180% since 2008.
DON has only 9% in financials, 15% in real estate, 16% in industrials, and 26% in consumer cyclicals. Morningstar gives it a five-star rating, and a ten-year risk rating of average versus a return rating of high.
Dividend ETFs for Retired Investors: iShares Select Dividend (DVY)
Source: Felix Carmona via Flickr (Modified)
Expense Ratio: 0.39%
The iShares Select Dividend ETF (NASDAQ:DVY) goes after a very specific list of stocks. It looks for 100 U.S. stocks with 5-year records of paying dividends, but angles toward larger stocks that fall more into the value category.
DVY is diversified across most of the major sectors, but avoids real estate. It is weighted towards consumer discretionary and staples with a combined 23.33% and utilities with 26% of assets. Other major sectors include financials with 15% of market value, industrials with 12% and energy at 10%.
It is the utilities that offer the greatest long-term dividend payout and growth potential. Utilities generate cash flow from rate payers, use the money to pay down debt and for capex, and then push the rest out to stockholders.
DVY is not a barnburner, but it is consistent, and yields 3.22%
Dividend ETFs for Retired Investors: iShares S&P US Preferred Stock (PFF)
Expense Ratio: 0.47%
iShares S&P US Pref Stock Idx Fnd (ETF) (NASDAQ:PFF) is one of my favorite dividend ETFs. That’s because I adore preferred securities. Preferred stock is a class of stock ownership that has a higher priority than common stock, particularly when it comes to dividends. Holders of preferred stock are generally to entitled to a higher dividend that must be paid out before dividends to common shareholders.
Once considered a rather exotic security, investors became comfortable with preferred stocks during the bond downturn. That’s because preferred stock trades like a bond (with a fixed dividend) while still representing a share of ownership in the company. Additionally, preferred stock usually pays more than what most bonds paid back when bonds yeilded more.
Best of all, if the underlying company gets into trouble, preferred stockholders get their money back before common stockholders.
PFF pays a dividend of 5.66%. It holds several dozen issues of preferred shares, and most belong to the financial sector. That is not a cause for alarm anymore, as most of the stocks in PFF are very solid companies with very solid financials and liquidity.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
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