The threat of high inflation looms large in the wake of the U.S. government’s loose fiscal policy. That’s why it will be important to find a source of investment income that will rise with inflation and help you keep all your retirement plans intact. Fortunately, dividend-focused exchange traded funds (ETFs) might do the trick.
In the past, dividend-paying common stocks were a popular way to invest for retirement, reports Tom Petruno for Market Beat. But with two market crashes in the last decade, many investors are spooked by the risk of capital loss.
However, with the recent market rally, advisors are optimistic and have started pushing the dividend-paying strategy to customers. [What You Should Know About Dividend ETFs and Taxes.]
“We’re pushing this idea with clients now,” said Rich Weiss, who as chief investment officer at City National Bank in Los Angeles oversees about $55 billion. “There’s a great case to be made for it.” [How Dividend ETFs Add Oomph.]
Here are some points to that case:
- It’s easy to find stocks paying yields greater than 3%, while a 5-year Treasury note yields about 2.6%. [Dividend ETFs That Beat Buffett’s Yield.]
- The United States will have to tighten up its fiscal policy by raising interest rates sometime in the near future. That will depress bond prices, making investments in these vehicles less attractive. In the case that an investor sells a bond before maturity, higher yields will also result in a loss of principal.
- Dividend-paying stocks offer payments that can rise with inflation. Case in point: Abbot Laboratories (NYSE: ABT) has lifted its dividend by 60%, Heinz (NYSE: HNZ) by 47% and Johnson & Johnson (NYSE: JNJ) by 71% since 2005. Inflation over that period was 13%.
- In the wake of the economic recovery, 284 firms have increased dividends in Q1, while only 48 have reduced dividends in the same period.
- The Obama administration wants to keep the dividend tax rate at 15% for couples earning less than $250,000 a year. Bond interest is taxed as ordinary income.
Josh Peters of Morningstar says that although dividend-paying stocks are the way to go, it will be hard to find bargain prices for them, especially as the market continues to rally. [Where You Can Find Value in ETFs.]
In that case, investors can offload the research to professionals and invest in dividend-focused ETFs to build a strong retirement portfolio.
For more stories on dividend-paying ETFs, visit our dividend ETFs category.
- iShares Dow Jones Select Dividend Index Fund (NYSEArca: DVY): 3.63% yield
- WisdomTree SmallCap Dividend (NYSEArca: DES): 3.4% yield
- SPDR S&P Dividend (NYSEArca: SDY): 3.39% yield
- Vanguard High Dividend Yield Index (NYSEArca: VYM): 2.75% yield
Sumin Kim contributed to this article.