Retirement planning is all about generating reliable income while preserving capital – and ideally growing it over time. If I had $7,000 to invest today with the goal of creating worry-free retirement income, I’d blend two proven strategies: investing in a high-yield dividend exchange traded fund (ETF) and selectively buying quality dividend stocks at good valuations. The key is to manage risk, especially in today’s high-flying stock market.
Source: Getty Images
Why dividend income matters
Dividend-paying stocks and ETFs provide regular income, making them perfect for retirees. Unlike growth stocks that rely on capital appreciation, dividend investments pay you to hold them. Even during flat or volatile markets, dividend income can help smooth out returns and support your living expenses.
Strategy 1: A reliable ETF for simplicity and diversification
For hands-off investors or those looking for simplicity, the Vanguard FTSE Canadian High Dividend Yield Index ETF (TSX: VDY) is a compelling choice. This ETF offers exposure to a basket of high-yielding Canadian companies, primarily in stable sectors like financials, energy, and utilities.
As of today, VDY yields around 4.2%, meaning a $7,000 investment could generate approximately $294 in annual income. VDY also provides built-in diversification, helping reduce the risk that comes with holding individual stocks.
However, there’s a catch: the stock market is currently hovering near all-time highs. Investing a lump sum now could expose you to a short-term market correction. To mitigate this risk, I would dollar-cost average (DCA) into VDY. By spreading my $7,000 investment over six to twelve months, I’d reduce the impact of market volatility and avoid buying all my shares at peak prices.
Strategy 2: Hand-pick quality dividend stocks
If you’re willing to do some research (or already have market experience), building your own mini-portfolio of dividend stocks can yield even higher income and capital appreciation. Right now, two names that trade at reasonable valuations are:
- Brookfield Infrastructure Partners L.P.
This global infrastructure powerhouse owns and operates essential services like utilities, transportation, and data infrastructure. It currently offers a dividend yield of about 5.3%. Brookfield has a track record of increasing its distribution annually and is backed by strong cash flows. With global demand for infrastructure rising, BIP.UN offers both income and growth potential. - Bank of Nova Scotia
One of Canada’s Big Six banks, Scotiabank has lagged its peers recently, which has pushed its yield to an attractive 5.9%. While the bank faces short-term headwinds, such as slowing loan growth and global economic uncertainty, its valuation is reasonable for long-term investors. You’re essentially being paid well to wait.
A split investment – say $3,500 in VDY (via DCA) and $3,500 equally divided between Brookfield Infrastructure Partners and Bank of Nova Scotia – would provide both diversification and a strong starting income yield of about 4.9%, or roughly $343 per year.
The Foolish investor takeaway
With just $7,000, it’s entirely possible to start building a worry-free retirement income stream. Whether you prefer the simplicity of a dividend ETF like VDY or the hands-on strategy of selecting individual stocks like Brookfield Infrastructure Partners and Scotiabank, focusing on stable, income-producing assets is key. Combine that with dollar-cost averaging to reduce risk, and you’ve got a sound plan for long-term income and peace of mind.
