Dividends help retirement investors manage risk.
There are a handful of strategies that every retirement investor should employ to manage risk. Dividends can provide reliable income even when the stock market is shaky. Large-cap, blue-chip stocks provide financial stability and predictability. And diversification reduces the inherent risk that any given stock will implode. Fortunately, retirement investors can utilize all these strategies at once in a single purchase by buying dividend yield exchange-traded funds. Bank of America analyst Mary Ann Bartels recently initiated coverage of a number of dividend ETFs. Here are nine of her top picks for retirement investors.
Schwab US Dividend Equity ETF (ticker: SCHD)
SCHD pays a 3% dividend, and Bartels says its fundamentals really stand out among its peer group. Only 7% of the fund's holdings are stocks rated "underperform" by Bank of America, and it has only 5% exposure to unfavorable market sectors, Bartels says. Finally, the fund's expense ratio of 0.06% is tiny, and it is highly liquid. Top holdings include Procter & Gamble Co. (PG), PepsiCo (PEP) and Verizon Communications (VZ). Bank of America has a "hold" rating for the SCHD fund.
Vanguard High Dividend Yield ETF (VYM)
VYM is a fund currently holding 406 equities aimed at delivering dividend yield for investors. The VYM fund also pays a 3.1% dividend. Bartels says the fund is extremely efficient due to its $26 billion asset base providing economy of scale. The VYM fund is also tied with the SCHD fund as the cheapest to own, with an expense ratio of just 0.06%. Top holdings include J.P. Morgan Chase & Co. (JPM), Johnson & Johnson (JNJ) and Procter & Gamble Co. Bank of America has a "hold" rating for the VYM fund.
First Trust Morningstar Dividend Leaders Index Fund (FDL)
FDL is an open-ended fund tracking the market cap-weighted Morningstar Dividend Leaders index. The FDL fund has a 3.8% dividend yield. Bartels says the most compelling reason to buy the FDL fund is its relatively high yield compared to the relatively low risk associated with its holdings. Unfortunately, a high 0.45% expense ratio makes it one of the least efficient dividend ETFs in the group. Top holdings include AT&T (T), Exxon Mobil Corp. (XOM) and Verizon. Bank of America has a "hold" rating for the FDL fund.
WisdomTree US LargeCap Dividend Fund (DLN)
DLN is a fund with nearly 300 stock holdings that is designed to track the dividend-weighted WisdomTree Large Cap Dividend index. The DLN fund has a 2.6% dividend yield. Bartels says one of the DLN fund's best traits is its extremely high liquidity, with a relatively tight bid-ask spread. That liquidity makes it easy for investors to exit and adjust their positions without losing an arm and a leg. Top holdings include Apple (AAPL), Microsoft Corp. (MSFT) and AT&T. Bank of America has a "hold" rating for the DLN fund.
iShares Core High Dividend ETF (HDV)
HDV is an open-ended investment fund that tracks the dividend-weighted Morningstar Dividend Yield Focus index. The fund pays a 3.3% dividend. The HDV is extremely cheap to own given its 0.08% expense ratio, and Bartels says it has above-average liquidity. The HDV fund isn't as diversified as other funds on this list, with only 74 total stock holdings and 61% of total assets devoted to the 10 largest holdings. Top holdings include AT&T, Exxon and Verizon. Bank of America has a "hold" rating for the HDV fund.
WisdomTree US Total Dividend Fund (DTD)
DTD tracks the fundamental-weighted WisdomTree Dividend index. The fund pays a 2.6% dividend. While its yield and liquidity aren't particularly appealing compared to the other ETFs on this list, Bartels says the DTD fund closely tracks its net asset value, reducing risk. Bartels says fees are relatively high given its 0.28% expense ratio. However, the DTD fund has 854 different U.S. stock holdings, providing extremely high diversification. Top holdings include Microsoft, Apple and AT&T. Bank of America has a "hold" rating for the DTD fund.
WisdomTree US High Dividend Fund (DHS)
DHS is a fund that holds 417 stocks and tracks the dividend-weighted WisdomTree High Dividend index. Like the DTD fund, Bartels says DHS has lackluster liquidity, but relatively high NAV tracking. It also has a 3.3% dividend yield, making it slightly more attractive from an income perspective than its fundamental-weighted cousin fund. However, Bartels says its high 0.38% expense ratio makes the DHS fund relatively expensive. Top holdings include AT&T, Exxon and Verizon. Bank of America has a "hold" rating for the DHS fund.
Fidelity Dividend ETF for Rising Rates (FDRR)
FDRR is a fund currently holding 131 equities aimed at tracking the dividend-weighted Fidelity Dividend Index for Rising Rates. The FDRR fund has a 3.5% dividend yield. Bartels says the fund's relatively poor liquidity is offset by its tight NAV tracking. Unfortunately, its 0.29% expense ratio means fees will eat into returns. It's also less diversified than other funds, with the top 10 holdings accounting for 25% of assets. Top holdings include Microsoft, Apple and Johnson & Johnson. Bank of America has a "hold" rating for the FDRR fund.
SPDR Portfolio S&P 500 High Dividend ETF (SPYD)
SPYD is an open-ended fund tracking the equal-weighted S&P 500 High Dividend index. It has the highest dividend of all the dividend ETFs mentioned at 4.3%. It also has a very low expense ratio of 0.07 percent. However, Bartels says the fund is about 17% exposed to stocks Bank of America rates "underperform." The fund holds just 80 stocks, and top holdings include Newell Brands (NWL), Campbell Soup (CPB) and AT&T. Bank of America has a "hold" rating for the SPYD fund.
Top dividend yield ETFs for retirement investors:
-- Schwab US Dividend Equity ETF (SCHD)
-- Vanguard High Dividend Yield ETF (VYM)
-- First Trust Morningstar Dividend Leaders Index Fund (FDL)
-- WisdomTree US LargeCap Dividend Fund (DLN)
-- iShares Core High Dividend ETF (HDV)
-- WisdomTree US Total Dividend Fund (DTD)
-- WisdomTree US High Dividend Fund (DHS)
-- Fidelity Dividend ETF for Rising Rates (FDRR)
-- SPDR Portfolio S&P 500 High Dividend ETF (SPYD)
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