Why Dividend ETFs Make Sense for Soon to Be Retirees
As many have seen I have been incredibly anti-ETFs in the past. But for one demographic, ETFs may serve a very underserved demographic-those reaching retirement age.
Criticism is Easy
It is very easy to find qualms with leveraged ETFs, commodity ETFs, and new actively-managed ETFs that don’t even have enough history for investors to even make sizable investments. Dividend ETFs, on the other hand, are hard to find issue with. In fact, I think they are one of the best investments out there for people reaching retirement age.
Yields, Appreciation, and Risk
The beauty with most “plain vanilla” exchange-traded funds is that they are easy to trade but also offer diversification among many different equities and even industries. One of my favorites is WisdomTree DEFA Equity Income (DTH), which yields a whopping 11.43% per year and does it with the help of foreign stocks which are largely distanced from economic problems in the United States. The fund is relatively safe, protected by large-cap value stocks which tend to be less volatile than small or mid caps.
The Timing is Now
With bond yields in the pits and stocks coming off multi-year lows, I honestly and truly think investors who are nearing retirement should shift a portion of their fixed income holdings into dividend stocks. I’m not at all advocating this strategy forever, and certainly not for everyone, but the time to take advantage of dividends is right now, when there are few other options. Certainly I expect that bond prices are going to dip, yields are going to soar, but if you’re buying in at these bond prices, you’re going to be underwater for some time to come when Wall Street starts worrying about inflation.
When bonds start falling when rates move higher where do you think investors are going to go? They could go to money markets, but no one wants a yield that lags inflation. They could go to stock funds, but by then we’ll be three times higher than March. Or they’ll go to dividend stocks, which will carry on as investors seek yields and also capital appreciation. Look, with a 12% yield, you can absorb plenty of losses. Or, if stock prices edge up 8%, you’re really going to like your 20% returns.
P.S. Check out my post on the three common retirement planning mistakes.