Con: Individual Stocks Can Be Risky Even If Theyre Value Stocks
For decades General Electric was a blue chip stock, meaning it was reliable and paid a consistent dividend. If you bought $100 of General Electric stock in 1970 and sold it in 2016, it would have returned more than 21 percent per year, and your final net worth would be $784,703.30.
Blue-chip stock definition: Blue-chip stocks are shares of industry leaders in mature industries that produce consistent profits and dividends.
On the other hand
The Great Recession forced General Electric to sell its lucrative financial services division and exposed the company as an unnecessarily big, complicated organization with a lot of hidden debts.
Its CEO from 2001 to 2016 stepped down, and his replacement served less than two years before another replacement was brought on board to right the ship. Then the COVID crisis hit demolishing one of GEs last profitable businesses: airline engines.
Today GE stock is worth only a fraction of what it was worth 10 years ago, and its dividend has been slashed.
Why Invest In Dividend Funds
Dividend stocks or funds supply a steady stream of income from dividend payments, which typically occur every quarter. This regularity makes dividend funds a good choice for retired investors.
However, those of any age can benefit. You can also choose to reinvest the dividends. This set-up is sometimes called a “dividend reinvestment program” or “DRIP.” Reinvested dividends are used to buy more shares of the investment they come from.
You may also choose mutual funds that pay dividends in times when bond mutual funds are weak. For example, when interest rates are low, but economic conditions are generally strong, bond funds can have lower yields than dividend mutual funds.
Top Dividend Mutual Funds
Most mutual funds hold at least some stocks that pay a dividend. Because of that, they collect some dividend income that must be distributed to investors on a proportional basis at least once each year.
However, some mutual funds specifically focus on owning stocks that pay dividends, especially those with a high dividend yield. Funds geared toward this strategy usually make more frequent distributions, typically quarterly or, in some cases, monthly. We’ll focus our dividend mutual fund search on those offering above-average yields.
Three standout dividend yield-focused mutual funds are:
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It’s Not Hard To Control A Portfolio’s Risk Level With Index Funds And Etfs
Many retirees prize risk controls, and one comment I sometimes hear of active funds is that they’ll earn their keep in down markets. Terrific active funds that have limited losses in tough times include FPA Crescent , Vanguard Dividend Growth , and Tweedy, Browne Value , to name just a random few. Yet there are also plenty of lower-risk index products that have managed downside volatility, including Vanguard Dividend Appreciation ETF and SPDR S& P Dividend ETF .
Perhaps an even more important point is that even though mild-mannered funds can help lower a portfolio’s overall risk, the most dependable way to move the needle on a portfolio’s volatility level–and indeed its potential for real losses–is by adjusting the stock/bond mix, not the underlying holdings.
How To Use Dividends For Retirement Income
There are numerous theories that speak to the best method to save for retirementa traditional asset allocation based on a time frame. This includes alternative asset classes to achieve diversification and dividends for income or to hedge against market risks. There are both advantages and disadvantages to using dividends during retirement.
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Role Of Dividend Index Funds In Your Portfolio
Investing in these index funds exposes you to dividend-paying stocks that can serve as an income stream during retirement. They can hedge against inflation, but dividends are never guaranteed.
A company can choose to reduce or stop its dividend at any time, such as during an economic downturn, when its profits might fall. The share price will often go down when that happens, which could reduce the value of the assets you invest in the fund.
Dividend-producing investments should be part of a diversified portfolio that you manage through a holistic plan. They should not be used as a sole source of income.
Pro: Dividend Stocks Perform Better During Times Of Inflation
We are currently in a period of very low inflation, and you might wonder what will happen to dividend producing stocks if inflation increases. Many companies that pay dividends the old-line industrial and consumer goods companies, utilities and banks also make bigger profits during inflationary periods.
Banks do better when money is changing hands often, and if the government raises interest rates to cool down inflation, banks make more money then too.
Inflation is also good for energy, materials and industrial companies because their pricing power and the price of what they sell goes up.
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Best Mutual Funds For Retirement: Dodge & Cox Balanced
Expenses: 0.53%Minimum Initial Investment: $2,500
Investors looking for a low-cost actively managed fund to hold in their retirement portfolio are wise to take a look at Dodge & Cox Balanced .
Around since 1931, DODBX is one of the oldest balanced funds on the market. Its also one of the best, in terms of cost and performance. The 20-year annualized return is 9%, which beats most mutual funds with more aggressive allocations.
The portfolio is moderately allocated with about two-thirds of assets invested in common stocks, which are predominately value-oriented names like JPM, WFC and Bank of AmericaCorp , with the remainder in bonds and preferred stocks.
I’m Determining How Much I Want This To Make Up My Retirement Plan
While living off of dividend checks is something I hope to do when I retire, I don’t want to make it my entire plan. For the past four years, I’ve stuck to a regular and robust SEP IRA contribution plan and want to use that retirement fund to support the majority of my lifestyle when I stop working. While I do have some dividend-generating stocks in my SEP IRA portfolio, it’s a very small amount.
In addition to what’s inside my SEP IRA, I want to continue to work toward a strategy that has my retirement plan shaping up to include 20% future income from dividend stocks, 30% passive income from real estate and small business investments, 30% income from my SEP IRA , and 20% from side hustles that I’d like to do when I officially retire.
Retirement Income Fund Vs Target Date Fund
Target-date funds are designed to make investing for retirement as simple as possible. Generally speaking, target-date funds are constructed around a planned future retirement date, which is most often included in the name of the fund, like the Vanguard Target Retirement 2060 Fund .
This objective defines the important differences between these two types of funds. First, target date funds designed for retirement 20 or more years from now typically have a 90% stock and 10% bond asset allocation. While this aggressive allocation is ideal for long-term investors, its not well suited for retirees.
Second, target date funds change their allocation as the target date approaches. These changes shift the allocation more towards fixed income to reduce the volatility of the portfolio as holders get closer to retirement. These changes in asset allocation are known as a funds glide path. Retirement income funds do not change the asset allocation over time.
Target date funds are designed to offer a single fund solution for retirement planning. These funds invest in domestic and international stocks and bonds in one fund. In contrast, retirement income funds are not necessarily designed to be a retirees sole investment choice. Some on our list might serve that purpose, such as the Wellington fund, but thats the exception, not the norm.
The author held no positions in the securities discussed in the post at the original time of publication.
Vig: Vanguard Dividend Appreciation Etf
The Vanguard Dividend Appreciation ETF contains stocks in 182 companies that have increased dividends in each of the last 10 years. The fund tracks the NASDAQ US Dividend Achievers Select Index . The yield was 1.61% as of April 29, 2021. A passively managed fund, the ETF offers a low expense ratio of 0.06%, which allows you to keep more of your gains.
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The Vanguard Dividend Appreciation Index
Another offering from Vanguard, the Vanguard Dividend Appreciation Index is an index fund that attempts to replicate the performance of the NASDAQ US Dividend Achievers Select Index. This index includes companies that have been increasing dividend payouts over time. Some of the largest holdings in this fund include investments in Microsoft Corp. , JP Morgan and Johnson & Johnson.
Index Funds And Etfs Lend Themselves Well To Cash Flow Extraction
Retired investors can employ one of two key tacks to extract cash for living expenses from their portfolios: an income-centric approach or a total return/rebalancing approach . The good news is that index funds and ETFs lend themselves well to either.
For income-centric retirees, the small fees that index funds and ETFs typically levy ensure that more of their dividends flow through to shareholders. It’s all but impossible for more-expensive products with similar mandates to generate a competitive yield without taking on additional risk. And while the original yield-focused index products often had embedded hefty sector bets, and paid for it during the financial crisis when banks slashed their dividends, the best dividend-focused index products today control for those biases.
For total-return-oriented retirees who are using rebalancing to meet living expenses, index funds and ETFs also work well. That’s because index funds and ETFs are typically pure plays on a given asset class. That makes it simple to identify which assets need to be scaled back to deliver the retiree’s desired cash flow and restore the portfolio to its desired asset-allocation mix. At midyear 2021, for example, most index-fund investors who need cash from their portfolios will be able to extract it by selling appreciated U.S. equity holdings, and they’ll reduce risk in the process.
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Pro: Dividend Stocks Are Usually Also Value Stocks
Stocks that pay dividends are shares of companies that make money. That means they have a steady profit they share with shareholders and theyre probably not going out of business any time soon. This makes them a somewhat safer, less risky, option for retirees.
Value stock definition: A value stock has a low price relative to the companys income and the dividends it pays.
Benjamin Graham, the father of value investing, said way back in 1949 that investors should buy stocks of profitable companies that have at least 20 years of reliable dividends. These companies have been paying a steady dividend for at least 50 years, and most of them youve known since you were born:
- The Coca-Cola Company
- Colgate-Palmolive Co.
- Hormel Foods Corp.
- Johnson & Johnson
- Lowes Companies
- Stanley Black & Decker
Value stocks that pay dividends are sometimes called dividend heroes because they are reliable providers of value in markets that can sometimes be rollercoasters riding high and sinking fast.
Turn Your Investments Into Automatic Income
Consider the T. Rowe Price Retirement Income 2020 Fund , designed for people in or nearing retirement, who are looking for regular monthly payouts from their investments. In addition to ongoing monthly dividend income, you’ll enjoy the convenience of an all-in-one fund with ready access to your money when needed.
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How Do You Choose Between A Dividend Fund And A Growth Fund
Dividend funds and growth funds have very different objectives, so your choice should reflect your investment goals. Growth funds aim to invest in relatively small companies that still have room to grow, and if they do, then you’ll enjoy capital gains. Dividend funds are less focused on capital gains and instead invest in large, stable companies that are unlikely to grow significantly. In place of capital gains, these stable companies reward investors by sharing profits through dividends.
The Balance does not provide tax or investment advice or financial services. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.
Con: Asset Allocation Can Be Tough To Figure Out
Whats the right mix of dividend producing investments and hedges against market volatility? Unfortunately, that depends on your risk tolerance.
The best way to model out the right amount of income you need versus the amount of money you want to invest to grow your nest egg is to use a bucket strategy. As part of the NewRetirement Planner, you can create a very detailed budget and set different levels of spending for needs and wants. This can be an incredibly useful planning exercise in helping you decide how much to invest when and where.
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Dtd: Wisdomtree Us Total Dividend Fund
The WisdomTree U.S. Total Dividend Fund owns 667 U.S. stocks that are weighted by expected dividend yield rather than the traditional approach of weighting stocks by a company’s market value. That approach allows you to own more stock in companies that pay higher dividends. The fund tends to give the most weight to the information technology and financial sectors.
This fund tracks the Wisdom Tree U.S. Dividend Index. It offered a 12-month yield of 2.68% and came with an expense ratio of 0.28% as of April 2021.
Wisdomtree Us Dividend Growth
The WisdomTree U.S. Dividend Growth Fund takes the above quality dividend approach, but it focuses on growth potential instead of historical results. It also builds in some allocation caps to ensure that it’s not overexposed to any single company or sector. This methodology results in a portfolio of 300 stocks that skews slightly more toward smaller companies.
This dividend growth fund has similar drawbacks with a fairly high 0.28% expense ratio and relatively low 1.78% distribution yield, but the potential for growth is appealing for younger retirees who need to balance income with growth. Growth is a great feature to hedge against inflation and protect your lifestyle in the later years of retirement. That focus on expanding dividends has helped the WisdomTree fund outperform the FlexShares ETF in total return since inception.
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The T Rowe Price Dividend Growth Fund
Based on the principle that increasing dividends over a period are positive indicators of a companys financial health and growth, PRDGX looks to invest in mostly stocks of large companies with some mid-sized companies mixed in. The fund seeks companies that have a strong track record of paying dividends or that are expected to increase their dividends over time.
The PRDGX contains mostly stocks of large U.S. companies that pay quarterly dividends. The PRDGX has an expense ratio of 0.63%. The fund’s inception date was Dec. 30, 1992, and has a $2,500 minimum initial investment requirement.
If Your Goal Is To Continue To Making Money During Retirement Without Doing A Thing This Is A Good Place To Start
Investing in exchange-traded funds can help retirees solve two challenges they might face in the golden years. Markets change, innovations bring new companies to the forefront, and the profitable companies of today may not be the profitable companies of tomorrow. First, it can ease the pain that comes from researching individual stocks and stressing over which choices to make.
The second challenge to solve is how to generate consistent income in order to replace the once-timely paychecks. Dividend ETFs that pay a monthly dividend, such as the Invesco S& P 500 High Dividend Low Volatility ETF, can help retirees enjoy a well-managed budget. Let’s take a look at that one, plus two others, each with something different to offer retirees looking for a best friend in their investment portfolio.
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Spdr S& p Dividend Etf
SPDR S& P Dividend ETF tracks the investment results that correspond to the total return performance of the S& P High Yield Dividend Aristocrats Index. The S& P High Yield Dividend Aristocrats Index tracks companies that have been consistent with their dividend increases for at least 20 years, which qualifies them as dividend aristocrats. This index, therefore, contains stocks that have both capital growth and dividend income characteristics instead of stocks that offer only attractive yields.
SPDR S& P Dividend ETF’s 1-year annualized returns equaled 16.03%, closely tracking the S& P High Yield Dividend Aristocrats Index which reported 1-year annual returns of 16.45% as of the end of February 2022. The fund offers a trailing-twelve-month yield of 2.71%
The fund’s holdings are mainly concentrated in the financials, industrials, consumer goods, and utilities sectors. The fund has a top-10 holdings concentration of 19.08% as of February end 2022. Among the fund’s top holdings we see high-yielding dividend stocks such as Exxon Mobil Corporation , AbbVie Inc. , International Business Machines Corporation , and Chevron Corporation .
A Closer Look At Some Of The Top Dividend Mutual Funds For Yield
Dividend stocks often make excellent investments. Companies that pay dividends have historically outperformed the S& P 500 with significantly less volatility. That’s because the dividend income is a meaningful contributor to a stock’s total return .
However, with so many companies making dividend payments, it can be challenging to pick the best dividend stocks. That’s where dividend mutual funds can help. They allow investors to own a diversified portfolio of stocks that generate dividend income.
Here’s a closer look at how dividend mutual funds work and some of the top dividend mutual funds to consider.
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