For retirees, choosing the right investment strategy is crucial. It’s about finding the balance between capital preservation, generating income, and fostering growth. While no dividend exchange-traded fund (ETF) can guarantee absolute capital preservation, a long-term investment mindset and the ability to weather market volatility are key.
The real focus, however, should be on the steady stream of income these funds can provide. Moreover, some level of growth is essential, as retirees may need to sell portions of their investments to fund their lifestyle as they progress through retirement. Here, we’ll explore two dividend ETFs that could be solid choices for retirees and income-focused investors.
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Vanguard FTSE Canadian High Dividend Yield Index ETF
The Vanguard FTSE Canadian High Dividend Yield Index ETF (TSX:VDY) is one of the most popular choices for Canadian retirees seeking stable income. This ETF aims to track the performance of a broad Canadian equity index, focusing specifically on companies that offer high dividend yields. With assets recently surpassing $3 billion, VDY is a substantial player in the Canadian market. Its management expense ratio (MER) is impressively low at 0.22%, which means you can keep more of your returns.
Recently yielding a healthy 4.4%, VDY distributes its dividends monthly, making it an attractive option for those who rely on regular income. A key feature of VDY is its heavy concentration in the financial services sector, which makes up more than 58% of the fund. This sector is home to some of Canada’s most stable and reliable dividend-paying companies. Notably, Royal Bank of Canada and Toronto-Dominion Bank are the ETF’s largest holdings, accounting for 16% and 10%, respectively. These big banks are known for their resilience and consistent dividend payouts, which should give retirees peace of mind.
The fund also has significant exposure to the energy sector, which constitutes over 28% of the total holdings. Energy giants like Enbridge and Canadian Natural Resources make up the third and fourth-largest positions in the fund. While these sectors offer strong income potential, retirees who prefer more diversification might want to look elsewhere to reduce concentration risk.
Schwab U.S. Dividend Equity ETF
For Canadian retirees looking for broader diversification and access to the U.S. market, Schwab U.S. Dividend Equity ETF (NYSEMKT:SCHD) is an astute option. This fund tracks the Dow Jones U.S. Dividend 100 Index, which includes 100 high-quality U.S. companies with a history of paying reliable dividends. Given the size of the U.S. market, SCHD boasts a far larger asset base than the VDY ETF, with net assets approaching US$62 billion.
At a recent yield of 3.5%, SCHD provides a solid source of income. However, unlike the VDY, which has heavy exposure to financials and energy, SCHD’s sector diversification is broader. The ETF’s holdings are spread across a variety of sectors, including 18% in financial services, 16% in healthcare, 14% in consumer defensive, and 12% each in energy and industrials. This diverse exposure allows retirees to benefit from a range of sectors, reducing the risk that comes with over-concentration in one area.
Another advantage of SCHD is its incredibly low net expense ratio of just 0.06%, making it an affordable choice for long-term investors. However, it’s important to note that the ETF’s exposure to utilities and real estate is relatively minimal.
Retirees who seek income from these sectors may need to complement this ETF with additional investments. Nevertheless, SCHD’s broad diversification and focus on quality dividend-paying companies make it an excellent choice for anyone seeking a reliable, income-generating investment.
