2 Dividend Funds That I Could Buy And Hold Until Retirement

J Studios/DigitalVision via Getty Images For many investors, it is important to identify specific securities that can be bought and held forever without having to worry about the risk of a permanent capital impairment. This is usually characteristic for investors, whose objective is to fund retirement years and benefit from the compounding magic. Plus, for income seeking investors, such an approach is also typical, where the idea is to buy and hold securities that produce defensive income, which is subject to a gradual growth over time. However, in many cases, there are objective reasons why cherry-picking individual securities would be a suboptimal thing to do. For example, for full-time employees, who work in a completely different industry than finance and have not the right education, picking stocks might not be ideal (although, there are obviously exceptions and, especially, in the context of Seeking Alpha audience). Similarly, it might be so that even though a person has both the experience and the necessary knowledge, he or she would prefer to spend time elsewhere rather than doing deep dives across many individual instruments. In such instances, dividend focused ETFs and / or funds come in handy. Not only there is a benefit in terms of the time saved, but also it automatically introduces an element of diversification and low cost. In the article below, I will elaborate on two dividend tilted vehicles, which, in my opinion, could be held for decades without taking too much of a risk, while still capturing the following aspects: Acceptable entry dividend yield. Long-term growth. Low risk. #1 Schwab U.S. Dividend Equity ETF (SCHD) SCHD is one of the most popular dividend growth ETFs, which provides a pure-play exposure to U.S. equities. The strength of this ETF lies in its strategy of investing in blue-chip names that distribute relatively acceptable dividends and have the right conditions to keep close to or even above double-digit dividend growth well into the future. The security selection mechanism is as follows: At least 10 consecutive years of dividends (for sample) Minimum $500 million in market cap (for sample) Maximizing the combination of the following factors: cash flow yield, return on equity, current yield and 5-year dividend growth (for selection). As you can see, it selects and reduces the overall sample to companies that could be deemed defensive and strong candidates for a long-term dividend growth. If we look at the current dividend that is offered by SCHD, we will see that it is actually positioned above the long-term average level. Seeking Alpha The above reflected yield of 3.5% is based on a TTM basis, which does not take into account the most recent dividend increases, which in the case of SCHD are not surprisingly notable. In essence, the combination of 3.5% dividend yield and last 5 year dividend CAGR of ~ 12.9% provides an enticing offering for long-term dividend investors to pocket from growing income without having to worry about dividend cut or significant loss of capital. For example, the Top 10 holdings list below confirms this aspect nicely, as all of these holdings carry investment grade balance sheet and the right long-term prospects to continue delivering stable dividend growth. Seeking Alpha The final thing to underscore here is that since almost the entire asset base of SCHD is biased towards growth factor, it means that these underlying securities embody notable duration aspect, which should trigger favorable price reaction as the interest rates go down. #2 Cohen & Steers Infrastructure Fund (UTF) Cohen & Steers Infrastructure Fund is a closed end fund with the primary objective to deliver high current income through inherently defensive assets that are spread across different segments of infrastructure. The embedded protection within the infrastructure space stems from the fact that in most cases the cash flows are backed by bankable long-term agreements, which are subject to pre-stipulated pricing with attached CPI escalators clauses. Looking at UTF’s asset base, we will observe a favorable presence of diversification with the electric utility segment being the largest one, accounting for 33% of the total exposure. Besides the electric utilities, UTF has notable investments in midstream, gas distribution, airports and road infrastructure. All of these areas could be easily deemed durable and generating predictable cash flows. Apart from the sector diversification, UTF is also geographically diversified, where the U.S. explains 59% of the total assets. The remaining part, with an exception of Canada that accounts for 10% of the total asset base, is distributed among almost 20 countries. The Top 10 holdings list indicate that there is no meaningful single security risk, and, importantly, just as in the case of SCHD, all of these names have well-capitalized balance sheets and strong cash flow generation profiles (i.e., blue-chip firms). Cohen & Steers Since the essence of UTF is so defensive, the Fund has assumed external leverage to enhance the yield potential. Currently, circa 30% of the total asset base is driven by external debt, which again should not be viewed as a significant risk due to the stability and predictability of UTF’s underlying cash generation (via its sound investment base). As a result of this, UTF’s current yield stands at 7.3%. Now, one of the main reasons why I am confident by buying and holding UTF for long-term is the secular demand drivers, which clearly favor the lion’s share of UTF’s investments. To be more specific, as UTF is heavily exposed to electric utilities, power producers and midstream players, the increasing demand for energy that is driven by AI expansion provides a clear and strong opportunity for these companies to not only grow their businesses, but also make sure that the demand for their existing infrastructure will be there. For example, the commentary by Sam Pollock – CEO of Brookfield Infrastructure Partners (NYSE:BIP)(TSX:BIP.UN:CA)(BIPC) – offers a nice color on this: Additionally, the large industry tailwinds such as AI are creating opportunities for well-capitalized businesses like ours where we are an obvious partner of choice for technology companies that are seeking alternative access to private capital. Our novel transaction with Intel from several years ago is providing the blueprint for similar large-scale opportunities which are gaining momentum. Similarly, the comment from Gregory L. Ebel – President and CEO of Enbridge (NYSE:ENB) – also gives an insight on how the demand is there for midstream players as well: Throughout our utility footprint, we are engaged in additional early stage discussions with data centers that we expect to translate into future growth. In gas transmission, our assets are ideally located and well connected. We are within 50 miles of 45% of all natural gas power generation in North America. In fact, in July, we achieved seven of our highest ever daily deliveries to U.S. power plants from our gas transmission system. We’ve had a range of customers in the U.S. Southeast that expressed interest in securing approximately 700 million cubic feet a day of transmission capacity to serve up to 5,000 megawatts of new gas power demand. In renewable power, our scale, financial and execution capabilities are differentiators. Data centers need base low power solutions such as natural gas to support the 24×7 energy demands of hyperscalers. The bottom line To buy and hold individual yield-focused securities, investors have to dedicate a great amount of time to really scope out the right names that provide the necessary combination of enticing yield, decent growth and protection. Since many investors do not have the time or interest to do so, diversified dividend tilted vehicles come into play nicely. In my opinion, if the objective is to seek predictable income that has a growth potential and where the risk of a permanent loss of capital is limited, Schwab U.S. Dividend Equity ETF and Cohen & Steers Infrastructure Fund are great instruments to consider.

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