Many retirees dream of building an investment portfolio large enough that they can simply live off the dividends and income it generates. That usually requires a diverse set of holdings across equities, fixed income and alternatives, such as real estate.
The rate environment for fixed income has improved substantially over the past few years. Yields of 4% are still available on risk-free Treasury bills. Investment-grade corporate bonds are offering yields of nearly 5%. Venture further out on the risk spectrum into junk bonds and you’ll find 6% to 7% yields.
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The equity side is a different story. The S&P 500 yields a near-record low of 1.1%. Dividend ETFs in many cases pay about 2% tgo 3% and top out around 4% before risk starts to really ramp up. Stocks, however, also provide capital-growth potential, so it’s the combination of share-price gains and dividend income that’s the big selling point.
Biggest Vanguard ETFs
Vanguard S&P 500 ETF VOO
Vanguard Total Stock Market ETF VTI
Vanguard Growth ETF VUG
Vanguard FTSE Developed Markets ETF VEA
Vanguard Value ETF VTV
Smart retirement portfolios generally have a mix of all these asset classes. Still, it makes sense to sprinkle in some of those higher yielding alternatives to add a little punch.
Does Vanguard Offer High-Yield Dividend ETFs?
When most people think of Vanguard dividend ETFs, they immediately think of the Vanguard Dividend Appreciation ETF VIG and the Vanguard High Dividend Yield ETF VYM. These are two of the world’s biggest dividend ETFs and would certainly work well in most retirement portfolios — but they’re not high yielders. VIG is paying only 1.6% and VYM is around 2.5%.
Great funds — not high-yield.
There are, however, high-yield ETFs in the Vanguard lineup. Most, not surprisingly, reside in the fixed-income space. Some are well-known; others are smaller, newer and/or not nearly as popular. That doesn’t mean they don’t work well as a high-yield investment.
How to Choose Vanguard Dividend ETFs for Retirement
Dividend income and yield can come from many sources. The biggest and most well-known dividend ETFs are appropriate for many retirement portfolios. The ultracheap, highly liquid and have smart stock-selection strategies.
The high-yield options are generally a little more specialized. They invest in narrower niches, foreign markets or use strategies that require a little more understanding.
You might not necessarily want to overload your portfolio with these off-the-radar dividend ETFs, but they often fill in nicely around the edges for investors looking to juice their returns a bit without overdoing it on risk.
Vanguard is a great place to find dividend ETFs like these.
3 High-Yield Vanguard Dividend ETFs
Here are three high-dividend-yield ETFs from Vanguard that could work for retirement investors.
Vanguard Emerging Markets Government Bond ETF VWOB
VWOB invests primarily in dollar-denominated bonds issued by emerging markets governments, including Mexico, Indonesia and Saudi Arabia. These bonds can have a variety of maturities, both short-term and long-term, and can be of any credit quality (the current mix is about 58% investment-grade and 42% non-investment-grade).
It currently yields 5.8%.
Emerging-markets bonds are definitely riskier in the fixed-income space. There will be a fair amount of volatility due to interest rate risk and credit quality risk. On the plus side, returns in this category have been strong lately, the current yield is above its historical average, and it’s benefited from improved fundamentals and global central bank policy decisions.
Vanguard Multi-Sector Income Bond ETF VGMS
This is one of Vanguard’s newer bond funds, having just launched in June. It’s actively managed, taking advantage of Vanguard’s deep research capabilities, and could be described as unconstrained. That means it can invest just about anywhere in the fixed-income space where the managers find opportunities. VGMS can invest in bonds issued around the world, all credit qualities and all security types.
It currently yields 5.3%.
An actively managed unconstrained bond fund can have a lot of advantages. What’s in favor often shifts over time and a fund such as VGMS can take advantage of that at all times. The composition is currently a roughly 50/50 split between investment-grade and junk bonds, so there is the potential for higher risk.
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Vanguard Core Plus Bond ETF VPLS
VPLS invests mostly in U.S. government and investment-grade corporate bonds, making it the least risky of these three funds. The “Plus” in Core Plus Bond ETF comes from the fact that it’s actively managed and can dynamically shift its allocation across bond categories depending on where the fund’s managers see the most potential.
It currently yields 4.5%.
The lower yield reflects the higher quality nature of the portfolio. When it’s positioned neutrally, VPLS offers a nice mix of U.S. corporate bonds, government bonds and mortgage-backed securities. Its ability to dabble in foreign or non-investment-grade bonds as appropriate is a nice option to have in the toolbox.
Key Takeaways
Higher yielding bond funds typically come with higher interest rate and/or credit risks.
VWOB invests in emerging market government bonds and yields 5.8%.
VGMS can invest in almost any fixed income security and yields 5.3%.
VPLS invests mostly in investment-grade U.S. bonds and yields 4.5%.
Income Ideas for Retirement
Vanguard isn’t necessarily known for its high-yield dividend ETFs, but it has some nice options in its lineup.
The important takeaway is that high yield usually means higher risk. Investing in emerging market bonds, junk bonds or long-term securities may require a higher risk tolerance and a longer-term outlook.
When combined with a higher quality stock/bond portfolio in modest quantities, these ETFs can help improve the yield from your retirement portfolio while only marginally adding risk.