2 Vanguard ETFs For Retirement Income

For those nearing retirement or already in their second act, looking into Vanguard’s exchange-traded funds (ETFs) is a great choice. The firm offers numerous products focused on income generation, which is critically important to prioritize for retirement. At the same time, you must hedge against inflation. Stocks are great vehicles for that, but they have large drawdowns during market corrections and recessions, and there’s no guarantee that any one company will keep its dividends intact forever.

That’s where dividend ETFs come into play. They allow investors to gain exposure to dozens or even hundreds of solid dividend-paying companies, reducing the blow of any individual company cutting its dividends.

However, putting all your money into just one ETF is not recommended. It’s a good idea to buy another ETF and hedge against the stock market volatility. A recession occurs every six to seven years. Having all your money allocated to stocks — or just one ETF — will drag down your net worth by a third or more every time a recession hits.

The following two Vanguard ETFs can provide the perfect balance between both reliability and income.

Key Points in This Article:

• The VIG focuses on dividend growers while also providing a solid yield of 1.89%, which it pays in quarterly installments.
• The BND provides exposure to the bond market, allowing shares to grow conservatively while yielding 3.93% and paying out monthly.
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Vanguard Dividend Appreciation Index Fund ETF (VIG)

The Vanguard Dividend Appreciation Index Fund ETF (NYSEARCA:VIG) replicates the S&P 500 U.S. Dividend Growers Index. You could also go for Vanguard High Dividend Yield Index Fund ETF (NYSEARCA:VYM). My rationale for choosing VIG over VYM is that the latter has had bigger drawdowns during recessions and a lower compound annual growth rate (CAGR). Companies with growing dividends also generally have better financial metrics than those with stagnant dividends. 

If you compare the dividend yield, VIG spins off 1.89%, whereas VYM spins off 2.66%. Let’s look at whether or not that yield is worth it. Over the past 10 years, VIG has generated an annualized return of 12.11%, while VYM yielded a lower annualized return of 10.37%. The max drawdown for VYM is also higher at 56.98%. VIG’s max drawdown is 46.81%.

The discrepancy in the dividend yield is also made up by VIG’s 5-year dividend growth rate of 11.08%. VYM’s 5-year dividend growth rate is at just 3.59%. The expense ratio of VIG is also 0.01% lower at 0.05%, meaning you only pay $5 for every $10,000 invested. With that in mind, VIG looks like a much better choice, unless you are very elderly.

The Vanguard Dividend Appreciation Index Fund ETF is comprised of 337 stocks. These holdings have had an average earnings growth rate of 11.9% over the past five years. Foreign holdings constitute just 0.1% of its holdings.

The holdings here are well-diversified. 24.5% of its holdings are in the Technology sector. 22.9% are in the Financials sector, 15.4% in the Healthcare sector and a bit over 11% each to Consumer Staples and Industrials. 

Vanguard Total Bond Market Index Fund ETF (BND)

Vanguard Total Bond Market Index Fund ETF (NASDAQ:BND) gives you exposure to a wide spectrum of all types of bonds, perfect if you want to hedge any drawdowns in the equity markets while being paid high yields. The current environment is especially great for ETFs that yield high. BND comes with a 3.93% dividend yield, and the distribution frequency is monthly. Monthly dividends are very intuitive for income.

If you look at BND’s performance, you’d find that it has actually had a 16.8% decline over the past five years. You shouldn’t let that scare you. That’s primarily due to BND being near all-time highs exactly five years ago. Investors were hungry for yield due to near-zero interest rates back then.

Moreover, interest rates are quite high at the moment. This is why the ETF’s current prices are comparable to those of October 2008. So you could lock in that 3.93% monthly dividend yield if you buy now. Interest rate cuts are expected to start in September this year. After that, the Federal Reserve could do another rate cut as early as October or November. Even more rate cuts are expected to take place if the inflation rate keeps trending lower.

There is some uncertainty regarding interest rates due to tariffs. Fed officials believe tariffs may lead to an increase in inflation. Trends have been the opposite so far, and this is a positive for BND. The Trump administration has also been pushing more and more aggressively for immediate interest rate cuts.

Interest rates should go down significantly in the coming years due to high debt servicing costs for the government. BND will become much more attractive once interest rates go down, potentially giving you 15-20% upside from here on top of that yield. The expense ratio is just 0.03%.

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