Top dividend ETFs – get cash for life

Top dividend ETFs – get cash for life

Cash for life from dividend ETFs?

Quite possible friends! Read on to learn why.

I would argue nothing makes investors consider dividend ETFs more like rock-bottom interest rates. And here they are. And they are not going up anywhere anytime soon…

But you don’t need to take my word for it.

You can heed the words of wisdom from a respected actuary about the massive demographic shifts now fully underway. Author and actuary Fred Vettese has been quoted as saying:

“Low interest rates and low inflation are here to stay.”

That means a generation and more of investors, like you and me in GenX, or millennials after me in GenY, are going to have to do one or more things to fund our retirement thanks to low interest rates triggered by Boomer demographic shifts:

  1. Save more; invest in a higher % of equities.
  2. Work longer.
  3. Spend less.
  4. Any combination of #1, #2 or #3 above.

You can find a couple of great books from Fred, and my reviews about them, via the links below:

Get your Essential Retirement Guide here.

The Essential Retirement Guide

Find out how you can generate Retirement Income for Life in this post.

Are there optimal ways to draw down assets?

Over the years, Vettese has put himself on record saying two or more of these methods below will help longevity risk AND promote a structured approach to asset decumulation:

  1. Invest in passively managed funds to lower your investment costs and fees over time – keeping more of money working for you (versus in the hands of greedy advisors).
  2. Start your Canada Pension Plan (CPP) later in life – something I wrote about here.
  3. Use some (not all), maybe between 25-50% or so of your RRIF assets to purchase a non-indexed annuity. Read up about how to manage your RRIF in this post here.
  4. Make adjustments to your spending habits. In “good markets”, spend more. In “bad times”, spend less. 
  5. Consider Fred’s “nuclear” option of using a reverse mortgage, later in life. (I personally wouldn’t do that but to each their own!)

So you don’t want to any longer full-time.  You want to earn income from your portfolio to supplement an early or semi-retirement.  You love your home and don’t want to use Fred’s “nuclear” option to fund your retirement.  What on earth are you going to do?  I have an answer below…

Cash for life – from dividend ETFs?

Inspired by the following emails from readers (adapted for the site post below), I think you can earn cash for life from a simple 3-fund dividend-oriented ETF portfolio.

Hi Mark,

I thought I saw you write recently about various ETFs but I was unfamiliar with one of them – which made me pause and think, geez, that’s a great idea!

I believe it was a U.S.-listed dividend ETF that invests in U.S. dividend aristocrats?  Do you remember that ETF?  Do you think that ETF is a good for my RRSP? 

The reason I ask is I recently sold a U.S. dividend stalwart and I’m thinking it would be much easier to get solid income from a U.S dividend ETF without the individual stock risk.

Thanks very much!

 

Hi Mark,

Love your site and how you are chronicling your journey to financial independence. Loved your six phases to financial independence – FI post!

In doing more thinking about how I need income from my portfolio to live from, I’m wondering if there is a dividend portfolio you’d recommend?  Should I consider investing in some dividend ETFs for cash flow? Thoughts?

I hope you post my questions!

I just love these types of questions. Why? Because these astute readers are wondering about low-cost ETFs, dividend-income ETFs and portfolio simplification – all things I’m very passionate about for my own portfolio too…

Why dividend ETFs?

Much like I shared on this page full of ETF posts (that I add to every year…) about ETF how-tos, other low-cost ETFs to own for your portfolio, dividend ETFs in particular can be outstanding products to own for these key reasons:

  1. You can obtain dividend stock diversity without taking on individual dividend stock risk.
  2. Although distributions might not grow as fast as the dividend increases from the stocks themselves, you can expect distribution income to grow with time.
  3. Low fees depending upon the funds you select – this will pad your pocket and not the pockets of financial advisors (probably my favourite!!!)
  4. Tax-advantages in taxable accounts thanks to our Canadian dividend tax credit, based on *Canadian fund construction only.

*This the tax treatment of Canadian dividend paying stocks (and ETFs too)!

Best dividend ETFs for income

Let’s get into it!

Canadian dividend ETFs

(information current at time of post)

ETF MER # Holdings Yield 5-Yr Since inception
Vanguard Canadian High Dividend Yield Index ETF (VDY) 0.22% 56 >4% 5.3% 8.4%

(2012)

BMO Canadian Dividend ETF (ZDV) 0.39% 51 ~4.5% 3.8% 6.6%

(2011)

iShares Core S&P/TSX Composite High Dividend Index ETF (XEI) 0.22% 74 ~5% 3.8% 5.6%

(2011)

iShares S&P/TSX 60 Index ETF (XIU) 0.18% 60 2.9% 6.1% 7%

(1999 – not a typo)

If I absolutely HAD to pick one, I’d go with XIU. (Disclosure:  I used to own it until I built my own Canadian dividend ETF). Why would I consider it again? 60 stocks, the bluest-chippers by market capitalization in Canada, steady distribution income, rising distributions over time and low-cost. Your cash for life would be spending roughly 3% yield from XIU with some steady growth over time. 

XIU Distributions

Image courtesy of iShares

U.S. dividend ETFs

(information current at time of post)

ETF MER # Holdings Yield 5-Yr Since inception
Vanguard High Dividend Yield ETF (VYM) 0.06% 406 >3.1% 9% 7.9%

(2006)

Vanguard Dividend Appreciation ETF (VIG) 0.06% 183 1.7% 10.9% 8.9%

(2006)

iShares Core Dividend Growth ETF (DGRO) 0.08% 478 2.2% 12% 11.4%

(2014)

iShares Core High Dividend ETF (HDV) 0.08% 74 3.3% 8.4% 11.3%

(2011)

Schwab U.S Dividend Equity ETF (SCHD) 0.06% 119 ~3% 10.5% 13.6%

(2011)

State Street SPDR Portfolio S&P 500 High Dividend ETF (SPYD) 0.07% 81 4.3% n/a n/a

(2015)

ProShares S&P 500 Dividend Aristocrats ETF (NOBL)* 0.35% 57 ~2% 11.3% 12.4%

(2013)

*Reader – this is the fund you were asking about.  It focuses on holding only dividend aristocrats, companies in the U.S. as part of the S&P 500 index that have raised their dividend for at least 25 consecutive years.

If I absolutely HAD to pick one, I’d go with VYM. (Disclosure: I own it). Why? Although the yield to spend is better with some other ETFs above, for now, it is the most diversified from the bunch with >400 stocks. VYM has delivered solid distribution income at or more than 3% yield over the decade of time I’ve owned it, and it has delivered rising distributions as well. Last but not least, it is low-cost. 0.06% MER is peanuts.

Your cash for life thanks to owning VYM would be spending your ~3% yield (the distributions of VYM) and selling some units of VYM over time as you please.

VYM Distributions

Image courtesy of Vanguard

International dividend ETFs

(information current at time of post)

ETF MER # Holdings Yield 5-Yr Since inception
Vanguard International High Dividend Yield ETF (VYMI) 0.32% 995 >4% n/a 9.6%

(2016)

Vanguard International Dividend Appreciation ETF (VIGI) 0.25% 409 1.4% n/a 10.8%

(2016)

iShares International Select Dividend ETF (IDV) 0.49% 97 >5.5% ~2% 1.4%

(2007)

State Street SPDR S&P International Dividend ETF (DWX) 0.45% 100 4.2% 1.3% 0.4%

(2008)

State Street SPDR S&P Global Dividend ETF (WDIV) 0.40% 99 4.4% 5.2% 6.2%

(2013)

If I absolutely HAD to pick one, I’d go with the international companion for VYM: VYMI. (Disclosure: I don’t own it yet but I am considering it in future years). Why? Like VYM, VYMI delivers solid yield while being the most diversified fund of the bunch (owning almost 1,000 stocks from around the world). Again, it has a modest cost for the diversification. Your cash for life due to owning VYMI would be spending 4% or so from those distributions and selling some VYMI units with time at your own discretion.

Hypothetical dividend ETF income

Lots to digest I know.

Where are we going with all this?

Back to my cash for life premise.

Assuming you worked hard, saved well, and had $500,000 in your retirement nest egg to approach semi-retirement or full-on retirement with, you should be able to earn (and spend) at least ~$16,500 as cash for life from your portfolio – if you just spend the ETF distributions alone… Taxation also not yet factored in.

Top dividend ETFs - XIU VYM VYMI

Of course, like any responsible investor who doesn’t want to leave a huge legacy while being tax savvy, of course you would strategically sell your ETF units over time since by owning such ETFs above, you should also expect to achieve some portfolio growth. Your responsible draw down plan will include incorporating any asset decumulation approaches Vettese recommends and more.

That includes spending more from your portfolio in “good markets” and pulling back a bit in “bad markets”.

It also means having a cash wedge as part of your solid retirement plan – beyond your dividend ETFs.

Last but not least, it probably means you should consider following some sort of a Variable Percentage Withdrawal approach – one of the best I’ve read about to help manage your retirement draw-down plan.  I have a free calculator for you to use in that post!!

Cash for life from dividend ETFs

History continues to tell us that dividend-paying companies have historically outperformed their non-dividend paying rivals.  Will history prove to be the norm going forward?  I don’t know.

I do know that, as an investor, owning many Canadian and some U.S. dividend stocks directly makes my portfolio, generally speaking less volatile and helps me stick to an investing plan I believe in.

That said, I also own some low-cost ETFs like the ones above for extra diversification.  I probably always will.

With up to three dividend ETFs that cover companies, countries and continents around the world, you can earn arguably the same passive income from your portfolio – an opportunity to live off dividends or distributions to some degree – as you would by owning these companies directly, with less individual stock risk for a very low fee. 

What are your plans to earn income from your portfolio during retirement?  Have you considered dividend ETFs like these for your portfolio?  Let me know your thoughts in a comment.  I read every one. 

My name is Mark Seed and I'm the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, we're inching closer to our ultimate goal - owning a 7-figure investment portfolio for semi-retirement. We're almost there! Subscribe and join the journey. Learn how I'm getting there and how you can get there too!

17 Responses to "Top dividend ETFs – get cash for life"

  1. Great article as usual!
    I’m a rather new retiree (2 yrs) and as many others I didn’t know how to go about income and decumulation being a new DIY investor. You helped me tremendously with your extensive info and case studies.

    I did purchase a couple ETFs which happened to be in your list above. I have since reverted to owning Canadian all stars and US Aristocrat shares directly as I didn’t like the variable up and down dividend payments of the ETFs. This is a personal choice and I realize that I’m exposing myself to the risk of less diversification.

    Having said that, I started a small direct investing account for my daughter with an ETF since variable dividend payments don’t matter, she doesn’t need them, they’re reinvested.

    So ETFs are great investment vehicles, still great during retirement for income, unless you don’t like the income ups and down like me.

    Reply
    1. Awesome Mary.

      I’m not sure if you saw this in my post, but I’ve given up on owning CDN ETFs at this time since I have essentially built my own dividend ETF:
      https://www.myownadvisor.ca/have-you-considered-unbundling-your-canadian-etf-for-income/

      That said, I think owning some of the CDN + U.S. + International ETFs are excellent considerations for folks that do not wish to engage in individual stock selection risk.

      With ETFs, you absolutely get “the good” with “the bad” stocks. Very challenging to know what ones will come out on top!

      Smart call on the reinvested distributions from ETFs. Money that makes money can make more money.
      Mark

      Reply
      1. I did, I should have said ‘like you I built my own Canadian dividend ETF’. Yes stocks selection is demanding and could be nerves racking at times (and you can make mistakes..) Got help on ‘prudent’ stocks selection with precious info on your site and a couple books like Henry Maw’s practical book.

        My point was that the ETFs distributions varie up and down, and I agree with you, they’re still excellent investments.

        Reply
        1. Oh very much so Mary. ETF distributions are hardly a straight line up but they should be expected to go up over time, and usually do. You certainly don’t get the same distribution increases as you might with some dividend paying stocks, which is why I’m a hybrid investor – I love my dividends for income and growing income and I like my ETFs for distributions and slow capital gains.

          Sounds like you have a good plan in place – glad any perspectives on the site helped 🙂
          Mark

          Reply
    1. I think it’s a good product May but I didn’t put it in my list for these reasons:
      1. I think going with U.S. listed ETFs offer a lower cost.
      2. I think the withholding taxes on ZDI will be modest – best to avoid where you can.
      3. 103 holdings are not very many if you are striving for international diversification – although I’m a terrible example since I don’t own any international-focused ETFs beyond U.S. at this time.
      4. Performance has been OK but certainly not stellar when comparing to S&P 500 or VTI or VYM or VIG, etc.

      Again, I don’t own it but there might be better products to consider.

      Just being honest 🙂 Don’t let that opinion change your approach!
      Mark

      Reply
    1. Hi Paul – you might want to reconsider putting VDY in a TFSA as the withheld US tax (15%) will not be a factor – VDY would be better in a RRSP/RRIF (no withheld tax ) or a non-registered account (get you a foreign tax credit for the withheld tax).

      Reply
          1. I recall Cut The Crap Investing is a big fan of VDY. Since it’s made up of mostly CDN banks and CDN pipelines, I figure I would just own those directly (and I do). Nice to be able to skim what the big funds own and save on fees 🙂

            How is your investing coming along?

  2. I owned global dividend ETF’s beginning in 2007 and right through the financial crisis. I didn’t enjoy the ride, so by 2010 I switched the RRSP’s and then TFSA’s to all index funds/ETF’s where they have been since.

    Reply
    1. Ya, I’m torn. The yield seems good for VYMI and a few others (since I intend to live off dividends in the early 5-10 years of semi-retirement) but I’m really not too sure. We’ll see. I’ll post some updates when I do!

      Are you a “hybrid investor” like myself Taggart?
      Mark

      Reply

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