If you’re looking to build a reliable stream of retirement income, the Vanguard FTSE Canadian High Dividend Yield Index ETF (TSX: VDY) can be one of the simplest places to start.
In fact, VDY is one of the best examples of the benefits that ETFs can offer. With a single investment, you can own a basket of established Canadian dividend stocks, giving you exposure to several businesses without having to research and monitor each one yourself.
Furthermore, VDY pays monthly distributions, making it appealing if you’re looking for income to help cover regular expenses.
That combination of convenience and diversification is a big reason dividend ETFs can be such useful long-term investments.
However, while there are plenty of dividend ETFs for retirees to consider, I wouldn’t necessarily limit a retirement income portfolio to those funds.
For example, adding a few high-quality stocks can give you more control over the income your portfolio generates, especially if you find attractive businesses your ETFs don’t own. Because even a popular dividend ETF can leave out some compelling income opportunities.
So, while dividend ETFs can provide a solid foundation and a tonne of benefits, it’s worth considering which individual stocks could help you collect more income and keep growing your portfolio over the long haul.
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Why it’s worth looking beyond dividend ETFs
When you buy a dividend ETF, you’re accepting that fund’s rules for choosing and weighting its investments.
VDY, for example, follows a market-cap-weighted index, so larger companies have a greater influence on its portfolio. In fact, at the end of September, financials and energy accounted for roughly 88% of its assets.
There are plenty of high-quality businesses in those sectors. However, that balance still leaves relatively little exposure to other parts of the economy, including businesses you might want to own more of.
In fact, VDY’s benchmark excludes real estate investment trusts (REITs) entirely. That means owning the ETF won’t give you exposure to the rental income those businesses generate.
Meanwhile, VDY currently offers a yield of roughly 3%. So, although that can still provide useful retirement income, there are quality Canadian stocks offering considerably higher yields alongside opportunities to keep growing.
That’s why adding selected individual stocks can be so worthwhile. You can put additional money into businesses whose income and growth potential appeal to you, while keeping the ETF as the core of your portfolio.
The key is finding companies with reliable cash flow supporting their payments and enough room to continue investing in their operations.
A higher-yield stock to boost your retirement income
One smaller Canadian income stock worth considering is CT REIT (TSX: CRT.UN), which offers a current yield of roughly 5.6% and pays its distribution monthly.
That’s nearly twice VDY’s yield, giving you a way to increase the income your portfolio generates through a business the ETF excludes.
Not to mention, CT REIT is an established dividend-growth stock that owns retail and industrial properties across Canada, with Canadian Tire as its largest tenant and controlling unitholder.
The relationship gives CT REIT opportunities to grow alongside Canadian Tire by acquiring, developing and expanding properties the retailer needs to support its business.
Furthermore, its long-term leases include built-in rent increases, giving CT REIT a way to collect more income from properties it already owns.
More importantly, CT REIT continues to keep its payout ratio manageable. In the second quarter, it paid out roughly 73% of its adjusted funds from operations.
Keeping that ratio manageable is exactly what helps support the distribution while leaving cash available to strengthen and expand the business over the longer term.
Plus, CT REIT has increased its distribution every year since going public, including a 3.5% increase earlier this year, giving investors both a generous starting yield and consistent growth in the income they receive.
That’s why, even with all the benefits high-quality dividend ETFs offer, finding reliable stocks like CT REIT to own alongside them can help you generate more income and grow your portfolio over the long haul.
