If you’re retired, need a passive income supplement from your investment portfolio, and strive to keep things simple and cost-effective, you should probably check out the list of Vanguard ETFs. In terms of getting the job done well, affordably, and effectively, it’s tough to stack up against the ETF legend, even with the ocean of other passive and active ETF products across the market.
Indeed, it really does seem like there’s an overabundance of ETFs these days, but you don’t really need to dig through all that’s out there.
In this piece, we’ll review two steady dividend-focused equity ETFs that are all a retired passive income investor needs to give themselves a nice boost. Though I think most retirees should own a mix of both, given what each brings to the table, I’m not against owning one of the other based on one’s individual needs.
Some retirees want more income, even if it means sacrificing capital appreciation and, perhaps more importantly to income-oriented investors, dividend appreciation. Other retirees might already have a fat pension and other income sources, making dividend growth a more important attribute than yield.
Vanguard High Dividend Yield Fund ETF
The Vanguard High Dividend Yield Fund ETF (NYSEARCA:VYM | VYM Price Prediction) is a more yield-focused ETF that can allow one to really beef up their income stream without running into trouble (many of the dividend stocks featured within the VYM have very well-covered payouts). Of course, the yield may be more than double that of the S&P 500 at 2.54%. But it’s not exactly the highest that an income investor can stretch their yield.
For instance, the Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD), which I’ve covered in prior pieces, has a richer, and still secure 3.67% yield. Of course, higher dividends naturally mean more modest capital and dividend appreciation potential. So, it’s a trade-off that retirees should discuss with their financial advisers. For those who don’t need the extra 1.1% yield bump, I’d much prefer the VYM, as it’s been a better performer and seems to offer a better balance between yield and growth.
Year to date, shares of the VYM have gained just north of 10% while the SCHD is up a mere 0.2%. Indeed, the extra percent and change of yield has not been a worthy trade-off. And while things could change moving forward, especially if investors turn against growth and rotate more towards yield and value, I must say I’m a much bigger fan of the VYM, as I don’t think it really compromises on growth all too much for the much higher yield relative to the S&P.
Also, the top 10 components of the VYM strike me as names that are more capable of considerable dividend growth over time. Fast-rising AI chip star Broadcom (NASDAQ:AVGO) and Bank of America (NYSE:BAC), which are in the top-10 list, are up 102% and 30%, respectively, in the past year.
As for the SCHD, many holdings have much higher yields, but some top-10 holdings have experienced considerable pressure on their share prices in the past year or more. Such holdings, while cheap and yield-friendly, could continue to act as a drag on performance.
Vanguard Dividend Appreciation Index Fund ETF
The Vanguard Dividend Appreciation Index Fund ETF (NYSEARCA:VIG) is an even better performer than the VYM, and it’s probably my favorite Vanguard ETF, period. And, yes, I prefer it to an S&P 500 or total stock market ETF. Why? The dividend growth strategy is a powerful one.
Not only do you get more capital appreciation potential, but you’ll be in for larger annual dividend raises, at least on average. If you’re a younger retiree, you’ll need such raises, especially in times of high inflation. As inflation rises, however, more dividend growth remains a significant perk, enabling investors to spend more or reinvest the excess.
While the VIG shares many of the same holdings as the VYM (most notably Broadcom, which is the number-one holding of both), there’s a greater focus on impressive growth businesses with yields below 1%. The Magnificent Seven group is well-represented by Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL), which are sub-1%-yielding AI stocks capable of gains. At the time of writing, the VIG yields 1.7%, more than the S&P, but quite a bit less than the VYM.
To put it simply, retirees should ask themselves how much yield they’ll need. If it’s in the mid-2% range, the VYM fits the bill, offering a decent amount of dividend growth and value. If one needs to stretch their yield closer to 4%, the SCHD could be the go-to. And, finally, if a 1.7% yield does the job, the VIG is a fantastic pick. If one wants to get specific with a figure, mixing and matching these high-quality ETFs is also a brilliant idea.
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