Dividend-Paying ETFs: A Source of Retirement Income

 |  Includes: IYR, PEY, PFM, SDY, XLU
by: Dividend Growth Investor

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 (NYSEARCA:PFM), PowerShares High Growth Rate Dividend Achievers (PHJ), PowerShares HighYield Dividend Achievers (NYSEARCA:PEY), and SPDR Dividend ETF (NYSEARCA: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 (NYSEARCA:XLU): 2.91%

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