Montana Money: How to Conserve Your Retirement Money with Dividend ETFs

After the debacle with the stock market in 2008 and even though it has come back, there is still a real fear of losing our retirement funds and not much of an appetite for risk anymore. Conserving what you have saved for retirement is crucial for your financial and mental health. Nothing is totally safe in the stock market and CDs and Treasuries pay next to nothing, there are some nice areas in the stock market you can feel good about investing your retirement money. No need to chase dividends when there are good solid companies that pay a reasonable dividend.

Since the start of the recession in 2008, the stock market has gone down 50%, back up again and recently we have sees movements of 300 points up or down per day.

For people nearing or at retirement age, this doesn’t lead to a very good night sleep. The constant wondering and worrying about our retirement funds after each day’s volatile stock market moves. Bank and CD rates are so low as to actually pay less than the rate of inflation, but they are a very safe way to conserve what money you have for retirement. But you will not gain any money and in fact can lose money due to inflation.

Growth or Dividends

In a previous article, I wrote about Finding the Best Dividend and High Yield Stocks. But many people do not want to buy individual stocks. And for many others with a 401k, IRAs and other retirement plans, we do not have the choice of buying separate stocks, we choose from mutual funds or ETFs.

I am not a certified financial planner, I am a realist and have watched this stock market scare people and keep them awake at night since the start of the Great Recession of 2008, and watched retirement plans lose money. Many planners will tell people that they need to have some growth stocks in their portfolio. Growth is great if you can sell it before it drops dramatically or you’re young enough to recoup major losses. For anyone who owned growth stocks in the late 1990’s and early 2000’s right before the so-called internet bubble popped knows all to well that growth stocks can rise nicely and fall rapidly.

When you’re close to retirement or already retired, the last thing you need is to have your retirement money drop 50% or more because you owned too many growth stocks and ETFs. The reality is that the stock market is lower today than it was almost 12 years ago at the start of the new century and some call it the lost decade as you can see from the following table.

Index	January 3, 2000 Close	October 4, 2011 Close
Dow Jones Ind Avg	11,357	10,808
S&P 500	1455	1124
NASDAQ	4192	2405

If you had primarily income producing dividend ETFs and stocks since 2000, you would not have lost as much money; in fact the steady dividends might have allowed you to make money instead of lose, even though many of these ETFs lost quite a large percentage in 2008. Steady income producing dividend ETFs is what anyone near or at retirement should consider for peace of mind and conserving your retirement money. What I like to see is an income producing dividend ETF or stock that hardly moves up or down, a low volatile dividend paying ETF or stock that continues to pay a nice yield.

Dividend ETFs

There are different types of ETFs that can be considered dividend ETFs. I will only mention the dividend ETFs that have good volume, decent yield and low beta. The lower the beta, the less volatile it should be. And the last thing we want is a dividend ETF that bounces up and down all of the time. A beta of 1 is equal to the volatility of the S&P 500 Index, above 1 is more volatile and below 1 is less volatile.

The yields listed are current as of October 5, 2011. As a general rule of thumb, the higher the yield, the more risk, but not always. A decent or high yield can mean the companies making up the dividend ETF have voted to give the shareholders a nice piece of the company in dividends, raising their dividend each year.

iShares Dow Jones Select Dividend Index Fund (DVY) has a beta of .89 and a yield of 3.87%.
iShares S&P US Preferred Stock Index (PFF) follows the S&P US Preferred Stock Index and holds approximately 250 companies, with the majority being in the financial sector and has a beta of .88 and a yield of 7.48%.
Vanguard Dividend Appreciation (VIG) has a beta of .82 and a yield of 2.36%.
Vanguard High Dividend Yield Index (VYM) has a beta of .97, a yield of 3.14% and a low expense ratio of .18%.
Guggenheim Multi-Asset Income ETF (CVY) has a beta 1.11 and the yield is 5.91%.
PowerShares Dividend Achievers (PFM) with a beta of .84 and a yield of 2.72%.
PowerShares Preferred Portfolio (PGX) mainly holds stocks of financial companies and has a beta of .76 and a yield of 7.16%.
PowerShares High Yield Dividend Achievers (PEY) has a beta of .98 and a yield of 4.35%.
SPDR S&P Dividend (SDY) with a beta of .87 and a current yield of 3.56%.
Wisdom Tree Total Dividend (DTD) has a beta of .99 and the yield is 3.24%.
Wisdom Tree Dividend ex-Financials (DTN) invest in companies that are not in the financial sector with a beta of 1.03 and a yield of 3.68%.
First Trust Morningstar Dividend Leaders (FDL) has a beta of .92 and a yield of 3.83%.
Utilities Select Sector SPDR (XLU) is an ETF that holds the stocks of approximately 25 utility companies. Utility stocks have always been regarded as having low volatility and stable dividend payments. The ETF has a beta of .54 and a yield of 4.16%.

2011 has not been a good year for the stock market so far. Of the above dividend ETFs, only two have a positive year-to-date return (YTD). FDL has an YTD of +2.2% and XLU has a YTD of +7.34% and PGX has a YTD of -1.63% as compared to the S&P 500 that has a YTD loss of -7.60%.

International Dividend ETFs

The majority of high yield paying stocks and bonds are outside of the United States. Adding an international dividend ETF to your income producing portfolio could increase your income stream. Be aware that some of these international ETFs can be volatile and have double-digit losses in 2011 because of the European banking and debt problems.

Other Dividend ETFs

The dividend ETFs listed above focus on large companies. There are also dividend ETFs that focus on the stocks and dividends of mid and small-cap companies, REITs, MLPs and more. Wisdom Tree probably has the most varied types of dividend ETFs.

What to do with the Dividends

If you are not concerned about receiving income from these dividend ETFs at this time, make sure you reinvest the dividends. The more shares of a dividend ETF you own, the more dividend income it will produce until the time you retire and will need the income. The compounding of reinvesting the dividends really does add up.

When you research dividend ETFs or any ETF, beta is not the only measurement you should know about. Learn about the Sharpe ratio, standard deviation and the Sortino ratio.

Update

Since this article was first written, the DJIA has broken records and now sits near 17,000. This has been an odd bull market with the unemployment rate barely dropping and consumer spending and wages flat. Most believe that this stock market has been propped up with the continued Federal Reserve easing and very low interest rates.

If you were able to hold on through the Great Recession, never forget the lessons learned because it can certainly happen again and most likely will. Dividend stocks are one of the best ways to invest in the stock market.

How to Conserve Your Retirement Money with Dividend ETFs