The typical investor spends years investing for retirement through a combination of 401(k) plans, individual stocks, exchange traded funds (ETFs), mutual funds and other investment vehicles for retirement.
Ideally, they are building a portfolio that will support them throughout their retirement years. But when they reach retirement, it’s also important to have another type of investment, one that will generate income while they’re retired. A good way to do this is to move some of that portfolio into an ETF that focuses on dividend income. Here are two great options.
1. Invesco S&P Ultra Dividend Revenue ETF
THE Invesco S&P Ultra Dividend Income ETF (appointment -2.58%) pays one of the highest dividend payout rates among dividend ETFs. It has a payout rate of 3.94% and a 12-month payout rate, which takes the average interest and dividend payments over the past 12 months, of 3.45%. Since ETFs are made up of multiple stocks, the 12-month rate gives investors better insight into the dividend yield.
The rate is so high because this ETF is designed to include not only high returns, but also sustainable and growing businesses. He follows the S&P 900 earnings-weighted dividends Index, which is an index that starts by pulling the 5% of stocks from the S&P 900 which have the highest dividend yields. This 5% is further reduced by selecting the wealthiest 5% from each sector that has the lowest dividend payout ratio. That comes down to about 60 stocks that not only have high yields but also low payout ratios, meaning they weed out stocks that can be considered dividend traps — those with high yields that are not sustainable.
There is another aspect of this fund that sets it apart from its peers. It weights holdings based on the revenue generated by companies in the most recent period. This ensures that the best performing stocks carry the most weight at any given time. Currently, the three largest farms are World Paramount, CitigroupAnd best buy.
In the fourth quarter, it paid a distribution of approximately $0.43 per share. Over the past year, its distribution was approximately $1.52 per share. THE ETFs is currently trading at around $43 per share, so if you bought 100 shares of this ETF, you would have around $152 in income and around $38 per quarter. Yet, you will still get solid returns because this ETF is also built for performance.
It is up 1.7% year-to-date and 9.3% in the past 12 months to February 28. For the five-year period ending February 28, it has an average annual return of 8.9%. Since its inception on September 30, 2013, it has recorded an average annual return of 10.6%.
2. SPDR S&P 500 High Dividend ETF Portfolio
THE SPDR S&P 500 High Dividend ETF Portfolio (SPEAR -2.38%) pays an even higher yield or distribution rate than the Invesco ETF. This ETF has an average dividend yield of 4.55% and an average 12-month distribution rate or yield of 4.93%.
This ETF follows the S&P 500 High Dividend Index, which assesses the performance of the 80 best performing companies in the S&P500 based on the last dividend. It excludes any special dividend.
Although it lacks the screens that the Invesco ETF needs to diversify by sector, include more sustainable dividends and weight by income, it is equally weighted to provide some diversification. But ultimately, the goal is to maximize the return. The main holdings at the moment are Extra space storage, Omnicom GroupAnd Packaging Corp. from america.
During the last quarter, it paid a distribution of approximately $0.52 per share. Over the past four quarters, the payout has been around $2 per share. Currently, this ETF is trading at around $39 per share, so if you buy 100 shares, you’ll have around $200 in income and around $50 per quarter, on average.
So, you definitely get more income from this ETF, at least in today’s market. But the overall returns are not as good as those of the Invesco ETF. Year-to-date, it’s up 1.2%, and for the one-year period ending Feb. 28, it returned -1.6%. The five-year average annual return is 7.1%, compared to an annualized return of 8.9% since its inception on October 21, 2015.
If you’re looking for some extra retirement income, it wouldn’t be a bad choice to invest some of that retirement portfolio in one of these ETFs.
Citigroup is an advertising partner of The Ascent, a Motley Fool company. David Kovalesky has no position in the stocks mentioned. The Motley Fool fills positions and recommends Best Buy. The Motley Fool recommends additional storage space. The Motley Fool has a disclosure policy.