ETFs for Steady Retirement Income

12/11/2014 8:00 am EST

Focus: ETFs

David Fabian

Managing Partner, FMD Capital Management

Those planning for a steady income stream in retirement tend to gravitate towards fixed-income; but to balance out that exposure, it’s imperative to maintain an allocation to dividend paying stocks with strong fundamentals, asserts David Fabian of FMD Capital.

In today’s markets, more established companies are focused on returning value to shareholders through quarterly dividends and share repurchase programs.

As a result, S&P 500 Index companies are expected to pay out record breaking dividend payments in the month of November totaling more than $41 billion.

The diversification and low-cost of exchange-traded funds make them a perfect vehicle for accessing these dividend paying stocks with room to grow. Nonetheless, picking the right fund is imperative to a successful outcome.

Two funds that should be on every investor’s radar are the Vanguard High Yield Dividend ETF (VYM) and Vanguard Dividend Growth ETF (VIG). Both ETFs focus on dividend paying stocks, but with a unique twist that deserve a more in-depth explanation.

VYM tracks nearly 400 stocks of companies with histories of paying consistently high dividends over time. This includes big names such as Proctor & Gamble (PG) and Verizon Communications (VZ).

The quality base of stocks that make up VYM have mature business models and produce consistent income to shareholders as a result of their proven methods.

Currently, this ETF has a 30-day SEC yield of 2.90% and pays income on a quarterly basis. One of the most attractive qualities of this ETF as a core holding for retirement portfolios is its low expense ratio of just 0.10% annually.

VIG uses a separate screening methodology to hone in on stocks that are growing their dividends over time. Currently, the portfolio is made up of 160 stocks with big names that include PepsiCo (PEP) and Wal-Mart Stores (WMT).

This ETF has more than $20 billion in total assets committed to stocks with attractive growth profiles and consistent cash flow models.

Currently VIG has a 30-day SEC yield of 2.01% and pays income on a quarterly basis as well.

While the income from VIG is not exceptionally high, the long-term theme is of selecting stocks with consistent dividend growth histories. This ETF also charges a similar expense ratio of 0.10% annually.

I like the combination of these two income-oriented ETFs because they have differing holdings that provide a wide coverage of the dividend stock universe.

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