Dividend-Paying ETFs: A Source of Retirement Income

At the start of the new millennium, about 12% of the U.S. population was over 65 years old. According to the U.S. Census Bureau, the baby boom segment of the population is expected to rise over the next two decades and approach 42% by 2030.

Investors who are approaching retirement are typically sold a wide array of fixed income investments like bonds, bond funds, and annuities. Those solutions do provide dependable income but with one significant drawback – they don't account for the eroding value of inflation. Even a modest 3% annual inflation rate corresponds to a 24% decline in purchasing power after 9 years.

As the first wave of baby boomers reaches the age of retirement, they are likely to shift their investment focus to unearned, investment income. While this will not happen overnight, the demographic trends are notable and could drive a major demand shift towards dividend-paying stocks – and consequently, the potential for price appreciation. Dividends have historically accounted for 40% of the total stock returns over the past 80 years.

Stocks that pay dividends provide a nice inflation hedge since their revenues and net income would be affected by an increase in overall prices paid by consumers. Dividends soften losses during bear markets and provide the only sources for investment gains in troublesome times. In addition, dividend income takes away the need to sell large chunks of your portfolio in a declining market. Retirement income could be solely derived from dividends and their growth would compensate the dividend investor for the erosion in the purchasing power of the dollar.

If retirees hold diversified portfolios of stocks which have the ability to grow their dividend payments over time, they would be well prepared for retirement. They should be focusing on stocks with high yields and ability to grow dividends, stocks with average yields but with above average dividend growth, and some domestic and foreign index funds for diversification.

There are several dividend ETFs out there which offer above average yields with the potential for portfolio dividend growth. These ETFs, geared towards dividend income growth, include PowerShares Dividend Achievers (PFM), PowerShares High Growth Rate Dividend Achievers (PHJ), PowerShares HighYield Dividend Achievers (PEY), and SPDR Dividend ETF (SDY). With yields of around 3-4% and the potential for dividend growth and capital appreciation, retirees could stop worrying about finances and start worrying about the lifestyle changes that retirement brings to them.

Here's a list of potential ETF's to consider and their yields:

PowerShares HighYield Dividend Achievers (PEY): 5.4%

PowerShares High Growth Rate Dividend Achievers (PHJ): 2.19%

PowerShares Dividend Achievers (PFM): 2.11%

SPDR Dividend ETF (SDY): 3.77%

Utilities Select Sector SPDR (XLU): 2.91%

iShares Dow Jones US Real Estate (IYR): 4.58%

Comments

[R. Richard ...:]

How about adding a comment about "safety of capital," for those events when liquidation may be required for emergencies.

One way to do that is add a comparative list of "total return" for each of the ETFs listed; or, better show a table of their fluctuations.

Be Ye Moderate in All Things.

2008 Mar 24 07:47 AM

[R. Richard ...:]

For example IYR is down a bit over $18 over the past year to $68.63 on the latter price the "yield" is 5.6% paid annually (? not quarterly?).

The Ms rating is for "above Average Risk" against lower than average Return !!

True this may a time for "turn" in IYR, but for retirement capital???

2008 Mar 24 08:06 AM

[Dividend Gr...:]

Richard,

If you look more closely in the ETF names, you will see that I am writing about a variety of ETF's and ETF strategies out there. So even if a retiree were to invest in the 6 etf's mentioned above they would be diversified. I don't think that the probability of a retiree liquidating their whole nest egg is that large, so i don't think that your IYR comment is very appropriate. Even if such an emergency were to happen, since we are diversified, why can't our retiree sell the utilities ETF instead of the real-estate ETF?

I am taking a long-term approach to investing. I am not concentrating on year over year changes.

2008 Mar 24 10:18 AM

[Thomas Smic...:]

Nice effort here. BUT, the safety of these ideas are questionable. Very questionable.

2008 Mar 24 10:33 AM

[User 132383:]

How about closed end bond funds which are paying 8 % to 12% right now? I couldn't live on the dividends you suggest.

2008 Mar 24 11:29 AM

[d_teller:]

All the data and comments are pertinent, but let me add:

Investing in high dividend paying Closed_End Funds means watching the NAV decline (if they have fixed% or so-called"managed dividend" policies), with the decline in the value of their diversified holdings...unlikely to go bankrupt (as have individual HiYld stocks, AHM, ?DFR; ?TMA...etc.), but may get liquidated if volume and interest in purchasing units isn't there (e.g., Claymore liquidated 11 CEFs this Spring). Often the NAV of their holdings is based on data that might be 3 - 6 months old.

Secondly, There are probably excellent securities from overseas, as ADRs (see BONY_Mellon for listings and sortings) that pay substantial dividends: TSP; CPL: etc. they're Telecoms and Energy companies, partly state (Brazilian) owned, and are healthy and growing or stable. In addition there are notable dividend-committed securities here, in the S&P500, e.g., ACAS; or (O), whose policies are to pay a constantly increasing dividend...but if the companies - that they lease to - go broke, in a general depression, their dividend stream wil disappear.

There are bond ETF's (BWX & PCY) that hold sovereign debt & won't disappear, but their value does oscillate.

Someone once suggested DOO, a high-yield ETF, but its share price has crumbled.

If you're trying to live off of dividend streams, you need a broadly diversified portfolio, with no more risk than 2% of capital in any one Stock security, and - not more than 5% of capital in any Mutual Fund/ETF/CEF, because their capital values may decrease 40%, and their dividends will subsequently also decrease, although the CEF's ETFs and Mutual funds are most unlikely to disappear.

2008 Mar 24 01:08 PM

[User 53817:]

I have been reading and trying to educate myself on this subject of dividend paying investments for our retirement we have 530 thousand which was previously 600 thousand last year diversifyed holdings in index funds. We also have 300 thousand in money market accounts which start paying at 5% but now much less. I want to have 200,000 of this in higher interest making investments but want them to be safe also. What is the best way to go. The Oxford club newsletter has a list of 8 closed end funds they consider safe with interests averaging 10%. Which sounds wonderful. But is this a good way to go. Any advise?

2008 Mar 30 03:59 PM