Is This the Best Dividend-Paying ETF for Retirees?
A strong dividend-paying ETF can provide an additional income stream in retirement.
By Dana George
As my husband enters (an earlier-than-expected) retirement, I find myself obsessed with whether I've done enough to create alternative sources of income. My latest interest has been in poring over dividend-paying exchange-traded funds (ETFs) to learn which ones best fit our latest goals and deciding whether I need to add yet another ETF. While I know we'll be fine, I want to ensure that I'm doing everything possible to maintain a reliable, steady income.
As I've narrowed down the dividend-paying ETFs I'd like to add to our portfolio, one keeps working its way to the top of the list: SPDR S&P Dividend ETF (SDY +0.28%).
Even if you check it out and it doesn't end up being right for you, the very qualities that make it attractive are the same qualities you might want to find in other dividend-paying options.
Consistent dividend growth
One factor that drew me to this ETF is its history of providing reliable income. SPDR S&P Dividend ETF tracks the performance of the S&P High Yield Dividend Aristocrats® Index (Dividend Aristocrats® is a registered trademark of Standard & Poor's Financial Services LLC), which includes companies with a strong track record of consistent and increasing dividend payments. The ETF itself has provided dividend increases for at least 20 consecutive years.
No matter which dividend-paying ETF you're considering, make sure it has a history of regular dividend payments. Those payments can be particularly beneficial during retirement, when you no longer receive a regular paycheck.
Diversification
With roughly 150 holdings, SPDR S&P Dividend ETF covers nine different sectors, including industrial, utilities, and consumer staples. Since I'm not a high-risk investor and seek to maintain a diversified portfolio, adding this ETF makes sense.
When seeking an ETF that meets your needs, prioritize diversification. And while you're at it, take the time to ensure there's no overlap. Overlap occurs when you purchase more than one ETF that includes the same stocks or assets. For example, if an ETF tracks a large index like the S&P 500, it will likely include the same stocks, bonds, and other assets as other ETFs that track the same index.
Low expense ratio
Many ETFs carry attractively low expense ratios. For example, SPDR S&P Dividend ETF has an expense ratio of 0.35%. However, that's not true of all ETFs, particularly sector-specific ones. A lesson it took me a while to learn is the importance of a low, fair expense ratio.
If you don't want the money you're working so hard to save to go toward fees, factor expense ratios in before investing in an ETF. The lower the fees, the larger the portion of your investment returns that come back to you. This is especially important as you plan for retirement, when every dollar counts.
Investing in an ETF is all about finding one that fits your long-term goals and maximizes your return. Whether the SPDR S&P Dividend ETF fits the bill for you and your portfolio, it's OK to ask for more from your next ETF.