These 3 Index ETFs Are a Retiree’s Best Friend

Before they’re done working, investors typically prioritize growth. After their work-based income ends, however, they want to focus more on income and capital preservation. They might also want to simplify their investments in retirement just so they can spend more time enjoying life.

Well, good news, retired investors! Exchange-traded funds or ETFs (which are bought and sold just like individual stocks) can meet retirees’ needs and make investing simpler. Here’s a rundown of three that, as a group, could be exactly what a retiree is looking for. Each of them brings above-average safety as well as above-average income to the table.

Vanguard High Dividend Yield ETF for dividend income

Starting with the most obvious and most pressing need, you’ll want to invest in something that can help you pay your bills once you’re no longer earning money at a job. The Vanguard High Dividend Yield ETF (VYM 0.34%) fits the bill.

As the name suggests, these ETF offers good dividend income. As of the latest look, its annualized dividend yield stands at 2.7%. However, note that the underlying payouts aren’t particularly consistent. The fund’s most recent quarterly payment of $1.02 per share is markedly different from March’s per-share payment of only $0.65, which was miles away from last December’s dividend of $1.10. So if you need money from this ETF, you’ll need to save some of these higher payments to offset lower payouts in other quarters.

But given the strength of the yield and the quality stocks you own via this ETF, it’s worth the trouble. The fund’s top holdings right now include digital communications tech name Broadcom, JPMorgan Chase, ExxonMobil, and Procter & Gamble. None of these stocks are highfliers, but all of the companies are built to last and dish out dividends as long as they do. These stocks also offer the prospect of decent dividend growth as well as capital appreciation, which you’ll still want/need even in retirement.

iShares Core U.S. Aggregate Bond ETF for bond safety

For years, interest rates lingered at such low levels that there seemed to be little point in purchasing bonds. That’s no longer the case, though. Even with their recent slide, interest rates remain near the multiyear highs they hit in late 2023.

Translation: You can still find great yields on bonds, although it might be easier just to own a well-diversified bond fund.

Enter the iShares Core U.S. Aggregate Bond ETF (AGG 0.24%). This ETF, meant to mirror the entirety of the U.S. investment-grade bond market, mostly holds Treasury bonds issued by the U.S. government, although it also owns a fair amount of paper issued by government-backed agencies like the Federal National Mortgage Association (Fannie Mae) and the Government National Mortgage Association (Ginnie Mae). The current collective yield being paid out to the fund’s owners is a healthy 3.44%. You can do better in terms of immediate income potential, but you’d be risking your principal to achieve those bigger yields. Bonds don’t offer any real potential for capital appreciation, but they also don’t pose any risk of major capital loss.

Bond ETFs are also a smart alternative to owning individual bonds, simply because these funds’ managers handle the tedious and never-ending task of replacing maturing bonds with new ones. And with an expense ratio of only 0.03%, it’s also probably cheaper just to let the iShares Core U.S. Aggregate Bond ETF’s managers do this work than it would be to handle it on your own.

ProShares S&P 500 Dividend Aristocrats ETF for dividend growth

Last but not least on this list, there’s the ProShares S&P 500 Dividend Aristocrats ETF (NOBL 0.38%). A Dividend Aristocrat® is a stock that’s raised its dividend payment every year for at least each of the past 25 years, although most Dividend Aristocrats® have done so for far longer. (The term Dividend Aristocrats® is a registered trademark of Standard & Poor’s Financial Services LLC.)

The upside of such stocks is relatively obvious: Owners’ dividend income grows over time, usually keeping up with if not outright outpacing inflation. For perspective, over the past 10 years, the ProShares S&P 500 Dividend Aristocrats ETF’s dividend payments have grown at an average annual pace of nearly 12%. Nice!

What’s the catch? There really isn’t one. You could argue that the relatively low dividend yield of just over 2% is a downside, and perhaps it is if you need more income right away.

If you can find a way of accepting a below-average dividend yield at the onset of your trade, though, it’s worth it. This ETF holds several high-quality names like The Clorox Company, McDonald’s, and insurer Aflac, just to name a few. These are reasonably safe names worth owning regardless of how much they’re dishing out in dividends.

You’ll likely achieve at least a little capital appreciation with this fund, and dividend stocks are proven winners over time. Research from mutual fund company Hartford indicates that over the past 90 years, the biggest net gains have been dished out by the market’s most reliable dividend payers and dividend growers, when reinvesting those dividend payments.