2 Magnificent ETFs for Retirees That Pay More Than 3%

Dividend-paying investments can be valuable for all types of investors. For retirees, they can be particularly crucial in generating a steady stream of income to help cover day-to-day expenses, especially as inflation rises. The income they bring in can also lessen the need to deplete savings and other investments.

A good dividend investment should offer not only a good yield but also some safety. Ideally, it shouldn't be something that needs to be monitored closely (which can be the case with risky dividend stocks that have high, unsustainable payouts).

This is why exchange-traded funds (ETFs) are highly valuable here. They provide diversification and dramatically reduce the risk that can come with investing in individual dividend stocks. A couple of ETFs that are truly magnificent, offering investors not only above-average payouts but also some excellent diversification, are the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) and the iShares Select Dividend ETF (NASDAQ: DVY). Here's why they can be excellent options for retirees to consider for their portfolios.

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Schwab U.S. Dividend Equity ETF

The Schwab U.S. Dividend Equity ETF yields 3.3% right now, which is far above the S&P 500 average yield of only 1.1%. That's three times the dividend income compared with an investment that tracks the broad average, and best of all, investors aren't taking on a riskier investment here.

This fund may actually be a safer option overall because its scope is narrower. It has exposure to 103 carefully selected stocks with strong underlying fundamentals (the fund relies on financial ratios to identify relatively strong stocks) and sustainable dividends.

This year, the ETF has risen by around 17% and has outperformed the S&P 500, which is up by about 10%. With strong demand for safety and dividends, the Schwab fund has proven to be a go-to option for investors. It's little wonder why that would be the case, as the bulk of its holdings are in stable sectors, such as consumer staples, healthcare, energy, and industrials. And with an expense ratio of only 0.06%, investors don't need to worry about significant costs chipping away at their gains from this investment.

With the Schwab Dividend Equity ETF, investors get a screened mix of safe, high-yielding dividend stocks at minimal cost.

iShares Select Dividend ETF

Another high-yielding ETF that looks magnificent right now is the iShares Select Dividend ETF. Its yield of 3.4% is slightly higher than Schwab's. However, its expense ratio is also higher at 0.38%. But as far as dividend-focused ETFs go, the iShares fund can still be an excellent option for retirees.

It has 99 holdings in its portfolio as of July 13. The notable difference between this fund and the Schwab fund is that the iShares ETF's holdings are more focused on financials and utilities. There are other types of stocks as well, but those two sectors account for roughly half of its portfolio. It seeks high-yielding stocks to help investors generate more income. This year, the ETF has risen by around 13% and has also outperformed the market.

The largest holding in the fund accounts for only about 2% of the overall portfolio, making this a fairly good, diversified investment to hold on to. Having limited exposure to any one stock can reduce the risk that an unexpected dividend cut or suspension will affect an investor's return from this investment.

Whether an investor chooses the iShares fund or the Schwab ETF may ultimately come down to the sectors they want the most exposure to. However, both are magnificent options and can make for terrific investments for retirees looking to generate a lot of dividend income while keeping their overall risk fairly low.

David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.