Are you a retired looking for more income? In most cases, you’ll look to bonds or dividend-paying stocks to find it. Those aren’t your only options, though. In fact, those arguably aren’t even your best options.
You may find it’s far easier to build a well-diversified, income-generating portfolio around a handful of dividend-oriented exchange-traded funds. Here’s a trio of such ETFs to consider, with each one bringing something unique to the table.
1. Vanguard Dividend Appreciation ETF
Just as the name suggests, the Vanguard Dividend Appreciation ETF (NYSEMKT: VIG) holds stocks of companies with a history of dividend growth. Namely, it’s meant to mirror the S&P US Dividend Growers Index. It consists of the 290 highest-yielding names — roughly 25% of the S&P 500 Broad Market Index‘s holdings, provided those companies have raised their annual dividend payments for at least the past 10 consecutive years.
In other words, it holds stocks of companies that have proven their payout growth has staying power.
And the fund’s own payouts from these dividends reflect this consistent growth. Last quarter’s payment of $0.69 per share is markedly better than the payout of $0.52 per share for the same quarter five years earlier. Ten years ago, the mid-year quarterly dividend payment was only around $0.32 per share. The trade-off is the relatively low yield you get whenever you first step into a position. The current dividend yield is a modest 1.9%, and that’s not out of line with its historical yields, even going back to 2008 when interest rates were wildly erratic.
It’s worth it, though, even beyond the below-average yield. The price of the fund itself is 160% higher than it was 10 years ago, giving income to investors a nice shot of capital appreciation as well.
2. SPDR Portfolio S&P 500 High Dividend ETF
At the other end of the yield spectrum, you’ll find the SPDR Portfolio S&P 500 High Dividend ETF (NYSEMKT: SPYD)currently dishing out a solid 3.8% of its value in the form of annual dividends.
As you might suspect, the SPDR Portfolio S&P 500 High Dividend ETF aims to own high-yielding stocks. The fund specifically mirrors the S&P 500 High Dividend Indexwhich is made up of the S&P 500‘s 80 highest-yielding stocks. Since the index’s highest-yielding tickers can change on a rather regular basis, the fund’s constituents are updated a couple of times per year to reflect these changes.
Veteran investors know that high yields can be a trap. The payouts look generous, but there’s often an underlying reason a stock’s price is low enough to push its dividend yield to among the highest within an index’s members. And certainly, this approach has allowed the occasional clunker to make its way into the portfolio’s mix. When you’ve got a total of 80 stocks in the mix, though, that occasional clunker’s problems are more than overcome by the remaining stock’s growth and strong dividend payments.
In this vein, the S&P 500 High Dividend Index is up more than 21% in the past five years and higher to the tune of 95% in the past 10. That’s in addition to the above-average dividends it’s paid out during that time. That’s not bad at all, even if its dividend growth is slower than that of the Vanguard Dividend Appreciation ETF.
3. Global X NASDAQ 100 Covered Call ETF
Lastly, add the Global X NASDAQ 100 Covered Call ETF (NASDAQ:QYLD) to your list of dividend-paying ETF prospects you should consider if you’re looking for additional retirement income.
For most investors, equity and index options (essentially, contractual bets that a stock or the market will move in a specified direction by a certain point in time) impose far too much risk relative to their prospective reward. They’re also fickle instruments, not to mention complicated. Even covered calls can be more of a pain to try than they’re worth despite sometimes being considered a riskless type of trade; the risk lies in the potential opportunity cost.
When left to the professionals who can give a full-time effort to the task, though, selling covered calls is an effective means of generating cash over and over again.
To this end, the Global X NASDAQ 100 Covered Call ETF’s current trailing-12-month yield of 11.4% is neither a fluke nor a typo. The fund has actually dished out that sort of income monthly.
There’s a catch of sorts. That is, when covered-call strategies are working, they’re generally working well. When they’re not working perfectly, though, they’re generally not working at all. That’s why retirees may not want to completely rely on income from QYLD. It’s best held side by side with more reliable income investments like SPYD and VIG, to buffer any sudden disruptions in its payout. Prospective owners may also want to look elsewhere if at least some capital appreciation is required. A portfolio of stocks used to write covered calls on typically doesn’t get much of a chance to grow, and QYLD hasn’t been an exception to this norm.
If you’re already generating enough reliable retirement income to live on, though — and can stomach taking a relatively risky shot on driving markedly more (but likely erratic) income — this one’s got potential.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Dividend Appreciation ETF. The Motley Fool has a disclosure policy.