Public companies often showcase their financial stability to shareholders through cash dividend payments. Well-established companies frequently distribute a portion of their profits to investors as cash dividends. For investors, these dividends serve as a reliable source of passive income.
These are some of the best dividend ETFs available on the market. We have included their yield and key holdings.
What Are Dividend ETFs?
Investing in dividend-paying companies through exchange-traded funds (ETFs) can be an effective strategy. A dividend ETF is a specialized fund that exclusively invests in companies known for paying dividends. Fund managers carefully select these companies based on specific criteria, including their size, industry, geographic location, and dividend track record.
Once you choose a dividend investment style, every holding within that ETF will share a similar profile. For instance, if you opt for a fund that focuses on large-cap companies with a consistent history of dividend payments, the fund manager will adhere to that investment strategy. This principle is important because your chosen investment style directly impacts the level of risk and potential returns.
ETFs offer convenience to retail investors by providing instant diversification at a low cost. This advantage makes dividend ETFs particularly attractive to novice investors, as selecting individual stocks requires a certain level of investment expertise.
Top Dividend ETFs in 2024
Here are some of the market’s most widely held dividend ETFs as of May 2, 2024.
Vanguard Dividend Appreciation ETF (VIG)
- Index Tracked: NASDAQ U.S. Dividend Achievers Select Index
- Investment Strategy: This strategy focuses on the growth of the dividend by choosing firms that have a consistent increase in dividend payments for at least a decade.
- Dividend Yield: 1.8%
- Top Holdings: Apple (AAPL), Microsoft (MSFT), Broadcom (AVGO)
- Expense Ratio: 0.06%
- Assets Under Management: ~$75.6 billion
Vanguard High Dividend Yield ETF (VYM)
- Index Tracked: FTSE High Dividend Yield Index
- Investment Strategy: Select high-yield dividend-paying companies based in the U.S., excluding REITs (real estate investment trusts).
- Dividend Yield: 2.9%
- Top Holdings: Exxon Mobil (XOM), JPMorgan Chase (JPM), Johnson & Johnson (JNJ), Broadcom (AVGO)
- Expense Ratio: 0.06%
- Assets Under Management: ~$52.7 billion
Schwab US Dividend Equity ETF (SCHD)
- Index Tracked: Dow Jones U.S. Dividend 100 Index
- Investment Strategy: Includes companies with strong financial performance, focusing on the quality and sustainability of their dividends.
- Dividend Yield: 3.5%
- Top Holdings: United Parcel Service (UPS), Chevron (CVX), PepsiCo (PEP), Texas Instruments (TXN)
- Expense Ratio: 0.06%
- Assets Under Management: ~$54.2 billion
SPDR S&P Dividend ETF (SDY)
- Index Tracked: S&P High Yield Dividend Aristocrats Index
- Investment Strategy: Screens for companies that have consistently increased dividend payments for at least 20 consecutive years.
- Dividend Yield: 2.6%
- Top Holdings: 3M (MMM), Realty Income (O), Chevron (CVX)
- Expense Ratio: 0.35%
- Assets Under Management: ~$20.2 billion
iShares Select Dividend ETF (DVY)
- Index Tracked: Dow Jones Select Dividend Index
- Investment Strategy: Select high-dividend yield companies — about 100 of them — based in the United States.
- Dividend Yield: 3.7%
- Top Holdings: Verizon Communications (VZ), Altria Group (MO), Pfizer (PFE), AT&T (T)
- Expense Ratio: 0.38%
- Assets Under Management: ~$18.3 billion
ProShares S&P 500 Dividend Aristocrats ETF (NOBL)
- Index Tracked: S&P 500 Dividend Aristocrats Index
- Investment Strategy: Screens for multinational household names with a history of increasing dividends for at least 25 years, with some doing so for more than 40 years.
- Dividend Yield: 2.1%
- Top Holdings: Albemarle (ALB), Colgate-Palmolive (CL), Dover (DOV)
- Expense Ratio: 0.35%
- Assets Under Management: ~$11.8 billion
How Dividends Work
Shareholders receive dividend distributions every three months. Occasionally, a company might distribute a one-time special dividend as an extra reward. Shareholders must hold the stock through the ex-dividend period to qualify for the next dividend payout.
The dividend yield is an important metric for any investor. It indicates the amount a company or fund pays relative to its stock price. To calculate the dividend yield, divide the yearly dividend by the stock’s price, resulting in a percentage. This yield can be based on either the dividends paid in the previous year or the anticipated dividends for the upcoming year.
Investing in dividend-paying Exchange-Traded Funds (ETFs) provides a consistent flow of passive income, the benefit of diversification, and the expertise of fund managers who carefully choose companies with a reliable history of dividend payments. These funds are an attractive option for growing your wealth and reducing investment risk, suitable for both beginners and experienced investors.
How to Invest in Dividend ETFs
A solid dividend strategy can be a pivotal component of an investor’s portfolio. Dividends have historically contributed significantly to overall investment returns. Research conducted by Hartford Funds indicates that since the 1930s, dividends have made up an average of 40 percent of the S&P 500’s total returns.
When these dividends are reinvested, they contribute even more significantly, accounting for 69 percent of the S&P’s total returns since 1960.
Dividend investing inherently tends to be less risky. Companies capable of issuing regular payments are typically more cash-rich than those focused on rapid growth. Esteemed groups like the Dividend Aristocrats, known for consistently increasing their dividend payouts yearly, epitomize this stability and commitment to shareholders.
Steps to Choose Dividend ETFs
When considering dividend ETFs, follow these four essential steps:
- Determine Your Financial Goals: Your financial objectives should guide your investment choices. For instance, someone approaching retirement might prefer a more conservative investment strategy. Always let your financial goals drive your decision-making process.
- Research Dividend Funds: When selecting dividend ETFs, scrutinize key factors such as dividend history, dividend yield, fund performance, expense ratios, top holdings, and assets under management. This information is typically available in the fund’s prospectus.
- Outline Your Asset Mix: Before investing, assess your existing assets and decide how you want to allocate your investments. Diversification is crucial to minimizing risk and maximizing returns.
- Know What You Own: Regularly review your investments to manage your finances effectively and make necessary adjustments. Utilize free resources from your broker, like consultations with a professional financial planner, and always ask questions. Remember, there’s no such thing as a truly hands-off investment.
Assessing Risk in Dividend ETFs
Like any investment, dividend ETFs come with potential risks. The level of potential losses is tied to the portfolio’s risk profile. For example, a fund heavily invested in riskier assets, like companies in emerging markets, will have a different risk profile than a fund investing in well-established companies. Macroeconomic factors, such as the interest rate environment, influence the risk level.
Are Dividend ETFs Right for You?
A dividend-focused investment strategy can be advantageous at various stages of an investor’s journey:
- Wealth Building: Dividends can help grow wealth over time as profitable companies distribute earnings to shareholders.
- Income Generation: Dividends are a reliable source of income, particularly for retirees.
Always align your investment goals with your choice of dividend ETFs. Working with a broker that offers dividend reinvestment into partial shares can expedite your wealth-building process by compounding your earnings faster.
Key Considerations for Choosing a Dividend ETF
When selecting a dividend ETF, consider the following:
- Fees: Understand the ETF’s expense ratio before investing. Some ETFs have low fees, while others may have higher fees that can erode your returns.
- Yield: Evaluate a dividend ETF’s yield to gauge potential income. While future dividends aren’t guaranteed, the yield provides an income expectation.
- Track Record of Returns: Review the fund’s historical performance alongside yield. A high yield is less appealing if the fund’s value declines over time.
- Portfolio Makeup: Examine the fund’s holdings for exposure to particular companies or industries. Significant exposure to one industry might reduce diversification benefits.
Tax Implications of Dividends
Dividend distributions can be taxed as regular income or at a reduced rate, depending on the type of investment account. These tax rules apply only to holdings outside tax-advantaged accounts like 401(k)s or IRAs, where dividends and capital gains aren’t taxed.
Conclusion
Dividends have been a substantial source of income for investors. Combining consistent dividend payments with appreciating stock values can be a powerful wealth-building strategy. Dividend ETFs allow you to invest in multiple companies simultaneously, offering more diversification than individual stocks. They are a robust way to receive healthy dividend payments from established companies and add a steady income stream to your portfolio.
Additional Tips
Consider starting with well-known and reputable funds for those new to dividend investing. Keep abreast of market conditions and reassess your portfolio periodically. Leveraging automated tools and staying informed through financial news can enhance your investment strategy.
