As you near – or enter – retirement, you probably want safe investments that produce income to finance your spending. Assuming that you have planned well, you don’t need to think about rapid growth anymore. Trying to grow too rapidly would mean adding unnecessary risk to your portfolio. This is not the stage of life to take on more risk.
Exchange-traded funds (ETFs) tend to work well during retirement. They provide the diversification needed to lower risk, and in the case of the ones below, the income needed to fund retirement goals.
Vanguard Dividend Appreciation Index Fund (VIG)
With Vanguard Dividend Appreciation Index Fund focuses on stocks that generate reliable dividends.
Over the last five years, the dividend payout has grown from $1.83 to $2.66 per share in 2021. Depending on how you want to frame it, that comes to 7.8% compounded annualized growth of 45% growth over five years. Either way, the Vanguard Dividend Appreciation ETF has delivered strong returns, even during a rocky stock market environment.
If your goal is to have your investments grow faster than the rate of inflation and produce a steady income stream, this looks like an excellent option.
The Vanguard Dividend Appreciation Index Fund contains 267 stocks. All of them are shares in American companies. The ten largest holdings make up about 31% of the ETF’s $78.5 billion in assets. Those biggest assets, from largest to smallest, include:
- Microsoft Corp.
- Johnson & Johnson
- UnitedHealth Group Inc.
- JPMorgan Chase & Co.
- Procter & Gamble Co.
- Home Depot Inc.
- Visa Inc.
- PepsiCo Inc.
- Broadcom Inc.
- Coca-Cola Co.
iShares Broad USD High Yield Corporate Bond ETF (USHY)
iShares Broad USD High Yield Corporate Bond ETF has the potential to generate stronger returns than the other ETFs on this list. But that’s because USHY contains high-risk junk bonds that have BB or BBB ratings from Standard & Poor.
The term “junk bonds” will scare away some investors. There is no escaping that quality is an issue, but they’re arguably the best junk bonds you can get. None of the companies are in default, and most of the debts are forecast to get repaid within five years.
The iShares Broad USD High Yield Corporate Bond ETF holds 2,096 assets worth a total of $7.52 billion. On average, the returns are higher than inflation, which is what you want during retirement. It also helps that USHY has a low-ish price (under $50) making it easy for almost all investors to afford shares.
The top issuers in iShares Broad USD High Yield Corporate Bond ETF, in order of weight, include:
- Occidental Petroleum Corporation
- CCO Holdings LLC
- Ford Motor Credit Company LLC
- Kraft Heinz Foods Co.
- Centene Corporation
- Tenet Healthcare Corporation
- Bausch Health Companies Inc.
- CSC Holdings LLC
- Dish DBS Corp.
- HCA Inc.
SPDR S&P Dividend ETF (SDY)
- Exxon Mobil Corporation
- Chevron Corporation
- International Business Machines Corporation
- South Jersey Industries Inc.
- AbbVie Inc.
- People’s United Financial Inc.
- National Retail Properties Inc.
- Cardinal Health Inc.
- Realty Income Corporation
- Amcor PLC
The ETF has about $20.3 billion in assets.
All of the companies on this list have increased their dividend payouts for at least 25 consecutive years. This trend will likely continue, which means you could get a payout every quarter for as long as you own shares.
SDY is a reliable investment option for retirees. Don’t let the term “high yield” set your expectation too high, though. When measured last, the ETF had a 2.4% 30-day SEC yield and a 2.7% fund distribution yield. Currently, that’s lower than inflation. Historically, though, that’s at or above-average inflation. Should the high inflation rates of 2021 and 2022 diminish as the Fed hikes rates further, SDY could help your portfolio grow throughout your retirement.