The popularity of exchange-traded funds has exploded recently. As part of Money’s series on an ETF for every age, the following discusses appropriate strategies and a fund that is suitable for retired investors.
Your career is in the rearview mirror. Early bird specials, senior discounts and time for your hobbies await. While the rest of us are stuck at work, a procession of cruise ships are at your beck and call.
But before embarking on that floating all-you-can-eat buffet, get your financial affairs in order. While you may be receiving Social Security benefits and making routine withdrawals from a retirement account, having an additional means of generating income could be the icing on the cake.
With this age group, a major emphasis should be placed on capital preservation. For some, that means abandoning equities entirely and reallocating to debt securities with near-zero risk and guaranteed yield, such as CDs and Treasurys.
But for those who want to remain in the market, doing so conservatively is ideal. And although you’re no longer pulling a weekly paycheck, you can turn to dividend ETFs that will pay you while you’re on the pickleball court.
High-yield ETFs
As equity securities, dividend ETFs can’t guarantee safety or fixed yields like debt securities can. Treasurys are backed by the full faith and credit of the U.S. federal government, meaning the government pledges to repay investors on these securities regardless of economic conditions. That makes them considered one of the safest investments available. Similarly, most CDs are protected by FDIC insurance. Generally, both offer fixed rates.
Passively managed income ETFs vs. actively managed income ETFs
One of the most popular options is the Schwab U.S. Dividend Equity ETF (SCHD), which launched in October 2011 and invests in high-dividend companies like Pfizer, Chevron and Coca-Cola — the latter of which is a Dividend King that has increased its payout for 62 consecutive years. With $65.28 billion in net assets, the passively managed fund pays a dividend yielding 3.76% with a low expense ratio of 0.06%. Over the past year, SCHD gained 7.34%.
But since yield — not share appreciation — is the primary objective for investors in this age group, the JPMorgan Equity Premium Income ETF (JEPI) presents a superior alternative. As an actively fund, JEPI carries a higher-yet-manageable expense ratio of 0.35%, meaning for every $1,000 invested, you will pay $3.50 in annual fees. But in return for that cost, you receive a dividend currently yielding 7.08% that is paid monthly, whereas SCHD makes its distributions quarterly.
To illustrate just how significant JEPI’s dividend is, if you have $100,000 invested in the ETF, it would yield $7,080 annually, or $590 per month. By contrast, that same $100,000 invested in SCHD would yield $3,760 annually, or $313 per month, and you’d have to way for quarterly distributions. Put another way, you’d receive 46.94% less monthly income from SCHD than you would with an identical amount invested in JEPI.
Unlike the passively managed SCHD, JEPI’s fund managers are able to achieve this by using a covered call strategy to generate income. Translation: Whereas SCHD’s yield comes from the high-dividend companies it invests in, JEPI’s yield is produced from the premium its managers generate by selling call options.
While this strategy may seem higher-risk, it actually helps reduce volatility and downside risk. And while selling call options limits the potential gains the fund produces, the result is ideal for investors in this age group. Since debuting in May 2020, JEPI has traded in a well-defined range between $49.71 and $63.19. Despite only gaining 4.95% over the past year, again, the goal of owning dividend ETFs is not to outperform the market.
In fact, the relative price stability JEPI offers is one reason it’s able to pay such a substantial monthly dividend — and one reason older investors looking to preserve their capital while generating income should be interested in this ETF.
More from Money:
An ETF for Every Age: Investors 18 to 35 Should Lean Into Risk (and Think Long-Term)
An ETF for Every Age: Investors 36 to 49 Should Embrace Growth (With a Side of Safety)
According to a recent report from Money.com, the popularity of exchange-traded funds (ETFs) has skyrocketed in recent years. As part of their series on ETFs for every age, the publication discusses appropriate strategies and a fund that is suitable for retired investors.
For those who have retired, it’s important to get your financial affairs in order before embarking on your well-deserved leisure time. While Social Security benefits and retirement account withdrawals may provide some income, having an additional means of generating income can be beneficial.
For retired individuals, capital preservation should be a top priority. This may mean shifting away from equities and reallocating to low-risk debt securities such as CDs and Treasurys. However, for those who still want to remain in the market, doing so conservatively is recommended. One option is to invest in dividend ETFs, which can provide a steady stream of income while you enjoy your retirement.
It’s important to note that dividend ETFs, as equity securities, do not offer the same level of safety and fixed yields as debt securities. Treasurys, for example, are backed by the U.S. government and are considered one of the safest investments available. Dividend ETFs, on the other hand, do not offer these protections and their yields can vary. However, they do have the potential for share appreciation, which can help your investment grow over time.
For retired individuals, the goal of investing in dividend ETFs is not capital appreciation, but rather generating passive income to supplement fixed income. One popular option is the Schwab U.S. Dividend Equity ETF (SCHD), which invests in high-dividend companies like Pfizer, Chevron, and Coca-Cola. This passively managed fund has a dividend yield of 3.76% and a low expense ratio of 0.06%. Another option is the JPMorgan Equity Premium Income ETF (JEPI), which is actively managed and may provide a higher yield for investors in this age group.
In conclusion, for retired individuals looking to supplement their income, dividend ETFs can be a valuable addition to their investment portfolio. While they may not offer the same level of safety and fixed yields as debt securities, they have the potential for share appreciation and can provide a steady stream of passive income. It’s important to carefully consider your options and consult with a financial advisor before making any investment decisions.
Source:Read More