Dogs will always hold the title of man’s best friend. But Fido’s not much help when it comes to generating income in retirement. For that, you’re smart to lean on an unconventional type of friend — a high-quality dividend ETF.
You might have a hard time accepting an income-generating security as a friend. That’s understandable, but if you keep an open mind, you may feel differently when you reach the end of this article.
Here’s a look at two dividend ETFs you’ll want to know better, plus a summary of the qualities that make these funds so attractive.
1. ProShares S&P 500 Dividend Aristocrats ETF
First up is an ETF that holds Dividend Aristocrats: ProShares S&P 500 Dividend Aristocrats ETF (NYSEMKT:NOBL). A Dividend Aristocrat is a company that has increased its dividend annually for at least 25 consecutive years.
Take a minute to ponder the magnitude of that decades-long accomplishment. Some Aristocrats, including Lowe’s, Coca-Cola, and Proctor and Gamble, have been pushing out annual dividend increases for 50 years or more. The economic challenges they’ve faced include:
- The Vietnam War
- 1970s stagflation
- Historically high interest rates in the 1980s
- Recession in the early 2000s
- The Great Recession
- The COVID-19 pandemic
Sticking with annual dividend increases through troubled economic times requires commitment and financial strength. A company that can fund a rising dividend over the long haul generally must have a disciplined approach to debt, plus strong and predictable cash flows. Those are good traits to add to your portfolio, even if you’re not looking for dividend income.
Of course, history doesn’t make any guarantees about the future. A Dividend Aristocrat could lose this coveted status, but therein lies the beauty of an ETF that’s built around a portfolio of Aristocrats. It would be surprising for any one Aristocrat to cut or cancel its dividend. It’s almost unfathomable that multiple Aristocrats would do so at the same time.
The NOBL portfolio includes 65 Dividend Aristocrats that are also S&P 500 companies. The stocks are equally weighted in the fund, and no single sector accounts for more than 30% of the portfolio. NOBL currently yields 2.0% and charges an expense ratio of 0.35%.
2. SPDR S&P Dividend ETF
Next is a fund that screens the companies in its portfolio to ensure quality: SPDR S&P Dividend ETF (NYSEMKT:SDY). The fund tracks the S&P High Yield Dividend Aristocrats index.
Stocks in the index (and the fund) must meet these criteria:
- History of increasing the dividend for at least 20 consecutive years
- Market capitalization of over $2 billion
- Average daily value traded must be $5 million or more for three months prior to index’s quarterly rebalancing date
- Individual stocks are capped at 4% to maintain diversity
The index weights each stock by its yield, which strengthens the fund’s yield. SDY yields 2.47% and charges an expense ratio of 0.35%. The portfolio includes 112 stocks spread across multiple sectors. The heaviest-weighted sectors are financials, utilities, consumer staples, and industrials, each accounting for 14% to 16% of the portfolio.
Qualities you want in a dividend ETF for retirement income
If you want to shop around for a new financial BFF, here are the qualities you’ll want to see in a dividend fund that supplements your retirement income.
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