Best ETFs for Retirement
Dividend stocks have been playing a crucial role helping investors save for retirement. After investors enter their retirement, dividend-paying stocks can also provide a steady stream of income. But what if you don’t have the time to build your own dividend portfolio?
Fortunately, there are dividend-paying exchange-traded funds (ETFs) that can help you achieve your investment goals. In this article, we are going to take a look at the best ETFs for retirement.
An ETF is an investment fund that trades on stock exchanges. Investors can buy and sell ETFs just as they would with regular stocks. An ETF holds assets such as stocks and bonds. In the case of dividend ETFs, dividend-paying stocks usually make up the bulk of their holdings.
Investing in ETFs for retirement has many benefits. One of those benefits is diversification. As income investors are well aware of, it’s not wise to put all your eggs in one basket, especially when saving for retirement. Typically, dividend-paying ETFs hold many companies in different industries. So investing in even just a few ETFs could achieve the same diversifying effect as investing in a much larger number of individual stocks.
Moreover, investing in ETFs also saves you the time and effort of picking individual stocks. If you want to have some dividend paying stocks in your retirement portfolio but don’t want to analyze individual companies, dividend ETFs would provide a convenient way of dividend investing.
When finding the best dividend ETFs for retirement, there are several things to consider. One of the most important things is dividend durability. This means investors should look beyond that yield number and see what companies are included in an ETF’s holdings. As I have said many times in this column, markets can sometimes be very efficient.
If a solid company has a high yield, chances are that investors will rush toward it. As they bid up the stock price, the company’s yield will no longer be that high. This means when you see a stock with an abnormally high yield, it could turn out to be a warning sign. Therefore, when you see a dividend ETF which has many ultra-high yield stocks in its holdings, you might want to do a bit more research before taking out your checkbook.
Still, as is the case with dividend stocks, there are plenty of dividend-paying ETFs with decent yields that are also suitable for retirement investors. One thing to note is that different investors have different goals and risk profiles. A 25-year-old that has just started saving for retirement can probably take a bit more risk with their portfolio than someone that is 55. Whether you are using ETFs or individual stocks, knowing your objectives and risk tolerance should be the first step in retirement investing.
Don’t forget, while ETFs can have many benefits, they do come at a price. Even the passively managed dividend ETFs charge a fee, although the management expense ratio (MER) could be very low, like 0.1%.
Below, I have compiled a list of the best ETFs for retirement.
Top 10 ETFs for Retirement
| ETF Name | Symbol | Dividend Yield | MER |
| Vanguard High Dividend Yield ETF | VYM | 2.76% | 0.08% |
| Powershares S&P 500 High Dividend Low Volatility Portfolio | SPHD | 3.68% | 0.30% |
| iShares U.S. Preferred Stock ETF | PFF | 5.67% | 0.47% |
| Vanguard REIT ETF | VNQ | 4.66% | 0.12% |
| Vanguard Dividend Appreciation ETF | VIG | 2.53% | 0.09% |
| ProShares S&P 500 Dividend Aristocrats ETF | NOBL | 1.77% | 0.35% |
| Vanguard Total Stock Market ETF | VTI | 1.82% | 0.05% |
| Vanguard Total International Stock ETF | VXUS | 2.77% | 0.11% |
| iShares Select Dividend ETF | DVY | 2.92% | 0.39% |
| iShares Core S&P 500 ETF | IVV | 1.9% | 0.04% |
List of the Best ETFs for Retirement Portfolio
1. Vanguard High Dividend Yield ETF
Vanguard High Dividend Yield ETF (NYSEARCA:VYM) is designed to track the performance of the FTSE High-Dividend Yield Index. The ETF provides investors a convenient way to track the performance of stocks that are projected to have above-average dividend yields. The fund’s passively managed, full-replication approach means the ETF has an expense ratio of just 0.08%.
The ETF’s top 10 holdings include some of the most solid dividend stocks, such as Johnson & Johnson (NYSE:JNJ), AT&T Inc. (NYSE:T), and Procter & Gamble Co (NYSE:PG). Vanguard High Dividend Yield ETF is currently yielding 2.76%. (Source: “Vanguard High Dividend Yield ETF,” The Vanguard Group, Inc., last accessed February 24, 2017.)
2. Powershares S&P 500 High Dividend Low Volatility Portfolio
Powershares S&P 500 High Dividend Low Volatility Portfolio (NYSEARCA:SPHD) tracks the performance of the S&P 500 Low Volatility High Dividend Index. The fund heavily overweighs defensive industries, with the three largest sectors in its portfolio being utilities (21.72%), real estate (18.6%), and consumer staples (10.92%).
This ETF has a dividend yield of 3.68% and an expense ratio of 0.30%. Its top three holdings are Iron Mountain REIT (NYSE:IRM), Welltower Inc (NYSE:HCN), and CME Group Inc (NASDAQ:CME). (Source: “SPHD – PowerShares S&P 500 High Dividend Low Volatility Portfolio,” Invesco Distributors, Inc., last accessed January 5, 2017.)
3. iShares U.S. Preferred Stock ETF
Other than holding common stocks, dividend ETFs can also own preferred shares of companies. Preferred shares have a higher claim on a company’s assets and earnings than common stock. What this means is that preferred shares generally have a dividend that must be paid out before dividends to common shareholders.
iShares U.S. Preferred Stock ETF (NYSEARCA:PFF) gives investors exposure to preferred stocks in the United States. The ETF tracks the S&P U.S. Preferred Stock Index. It has a dividend yield of 5.67% and a management expense ratio of 0.47%. To limit concentration risk, no single issuer is allowed to have a weight of more than 10% in this ETF’s holdings. (Source: “iShares U.S. Preferred Stock ETF,” iShares, last accessed February 24, 2017.)
4. Vanguard REIT ETF
Regular readers of this column would know that I’m a big fan of real estate investment trusts, or REITs. These companies are required by law to distribute at least 90% of their taxable income to shareholders as dividends annually. That’s why I believe Vanguard REIT ETF (NYSEARCA:VNQ) is one of the best ETFs for retirement income.
Vanguard REIT ETF aims to track the performance of the MSCI U.S. REIT Index. Its top three holdings are Simon Property Group Inc (NYSE:SPG), Public Storage (NYSE:PSA), and Equinix, Inc. (NASDAQ:EQIX). The fund has an annual dividend yield of 4.66% and a management expense ratio of 0.12%. (Source: “Vanguard REIT ETF,” The Vanguard Group, Inc., last accessed February 24, 2017.)
5. Vanguard Dividend Appreciation ETF
One thing that’s better than a steady stream of income is a growing stream of income. That’s why for retirement investors, it’s important to have stocks that offer dividend growth potential. One ETF that offers such potential is Vanguard Dividend Appreciation ETF (NYSEARCA:VIG).
VIG ETF seeks to track the performance of the NASDAQ U.S. Dividend Achievers Select Index, which includes companies that have increased their dividends every year for at least 10 years. Its top three holdings are Microsoft Corporation (NASDAQ:MSFT), Johnson & Johnson (NYSE:JNJ), and PepsiCo, Inc. (NYSE:PEP). VIG ETF is currently yielding 2.53% and has an expense ratio of 0.09%. (Source: “Vanguard Dividend Appreciation ETF,” The Vanguard Group, Inc., last accessed February 24, 2017.)
6. ProShares S&P 500 Dividend Aristocrats ETF
10 years of consecutive dividend hikes is quite an achievement, but there are companies with more impressive track records when it comes to raising dividends. For instance, stocks that have at least 25 years of consecutive dividend hikes earn the title of dividend aristocrats. And there is an ETF that allows investors to invest in them.
ProShares S&P 500 Dividend Aristocrats ETF (BATS:NOBL) aims to track the performance of the S&P 500 Dividend Aristocrats Index. It is the only ETF that focuses exclusively on dividend aristocrats. The fund’s top 10 holdings include large cap companies such as AT&T Inc. (NYSE:T), Nucor Corp (NYSE:NUE), and Chevron Corporation (NYSE:CVX). (Source: “S&P 500 Dividend Aristocrats ETF,” ProShares, last accessed February 24, 2017.)
NOBL ETF has an expense ratio of 0.35% and an annual dividend yield of 1.77%.
7. Vanguard Total Stock Market ETF
For investors that want to have access to the full depth and breadth of the U.S. stock market, Vanguard Total Stock Market ETF (NYSEARCA:VTI) is worth taking a look.
Vanguard Total Stock Market ETF aims to track the performance of the CRSP U.S. Total Market Index. The fund holds large-cap, mid-cap, and small-cap equities diversified across growth and value styles. By the end of January 2017, the fund held 3,592 stocks with total net assets of $518.0 billion. It is also extremely inexpensive, with an MER of just 0.05%.
VTI ETF has an annual dividend yield of 1.82%.
8. Vanguard Total International Stock ETF
Retirement investors who want some international exposure would be glad to know that there are ETFs that focus exclusively on companies outside the U.S. Vanguard Total International Stock ETF (NASDAQ:VXUS) would be a good example.
Vanguard Total International Stock ETF tracks the performance of the FTSE Global All Cap ex U.S. Index. It gives investors exposure across developed and emerging non-U.S. equity markets. Some international ETFs may involve high fees, but VXUS ETF has an expense ratio of just 0.11%. The fund is currently yielding 2.77%. (Source: “Vanguard Total International Stock ETF,” The Vanguard Group, Inc., last accessed February 24, 2017.)
9. iShares Select Dividend ETF
iShares Select Dividend ETF (NYSEARCA:DVY) seeks to track the investment results of the Dow Jones U.S. Select Dividend Index, which includes relatively high-dividend-paying stocks in the United States. The fund provides investors access to 100 U.S. stocks with five-year records of paying dividends.
DVY ETF has an expense ratio of 0.39% and is currently yielding 2.92%. Its top three holdings are Lockheed Martin Corp (NYSE:LMT), CME Group Inc (NASDAQ:CME), and Chevron Corp (NYSE:CVX). (Source: “iShares Select Dividend ETF,” iShares, last accessed February 24, 2017.)
10. iShares Core S&P 500 ETF
To round off the list of the best ETFs for retirement is the iShares Core S&P 500 ETF (NYSEARCA:IVV). As the name suggests, the fund tracks the performance of the S&P 500 Index.
The number-one reason to own iShares Core S&P 500 ETF is its low fee. With an expense ratio of just 0.04%, the fund provides one of the cheapest ways gain access to the 500 largest-cap U.S. stocks. The IVV ETF currently yields 1.9%. Investors looking to track the benchmark index should seriously consider this low-cost ETF. (Source: “iShares Core S&P 500 ETF,” iShares, last accessed February 24, 2017.)