Dividend investing is one of the most time-tested methods for building long-term wealth. Many people choose dividend-paying stocks because of the yield and the dividend they receive for being a share owner. Getting cash for holding stocks sounds like a good deal, especially for those looking for passive income to live on during retirement.
The problem is the need for more diversification instead of just owning a couple of dividend stocks. That is where a qualified dividend ETF can help smooth those rocky times in the market.
Many dividend ETFs claim to be the best on the market, but what makes them the best? Is it the yield? Could it be the appreciation of the fund? Maybe the fund has a large cult following.
In this article, we will examine seven of the best dividend ETFs to determine which could be the best.
What Is a Dividend ETF?
Dividends are cash distributions made to shareholders based on a company’s profits. Many investors adopt the strategy of dividend investing and use dividend stocks to generate passive income. Similarly, dividend ETFs operate on a comparable principle.
These ETFs are exchange-traded funds, akin to mutual funds in the stock market, which primarily consist of dividend-yielding stocks. Non-dividend-paying stocks are typically excluded from these ETFs. The dividend yields of many such ETFs range from 2% to 5% or even up to 6%. Despite market fluctuations, these funds can provide a stable cash flow to investors.
What Is The Best Dividend ETF?
Explore these 7 top dividend ETF options, each with unique pros and cons.
SCHD: Schwab Us Dividend Equity ETF
SCHD has become a popular choice among investors. It was introduced by Schwab in late 2011, at the beginning of the bull market. SCHD reflects the performance of the Dow Jones Industrial 100 Dividend Index, which includes 102 different companies that have consistently increased their dividends over the last decade. SCHD is considered a high-growth dividend ETF, with an average dividend growth rate of 12% over the past five years.
SCHD stands out as an appealing dividend ETF for your investment portfolio due to its attractive yield of 3.54% and a capital appreciation that closely aligns with the S&P 500’s performance over the past decade. With an average return of 12.22% during this period and a modest expense ratio of 0.06%, SCHD presents itself as a cost-effective choice for your investment portfolio.
Investors may observe that SCHD and VOO, an S&P 500 ETF, exhibit similar overall performances, yet SCHD boasts a higher yield, making it an enticing option for dividend-focused investors. If you seek a robust yield exceeding 3% and solid overall performance surpassing 12%, SCHD emerges as a top choice among dividend ETFs for your investment portfolio.
VYM: Vanguard High Dividend Yield ETF
VYM is a popular dividend ETF that many investors consider adding to their portfolios. As a Vanguard ETF that tracks the FTSE High Dividend Yield Index, VYM consists of high dividend-paying stocks.
Compared to SCHD, VYM offers greater diversification with a broader range of stocks. This reduces the impact of market volatility if one stock experiences a significant hit. With a portfolio of 440 stocks, VYM presents a more balanced exposure.
VYM offers an attractive yield of 3.09%, which appeals to numerous investors. Although it may not provide the highest yield compared to other options, its low expense ratio of 0.06% positions it favorably among dividend ETFs. VYM has exhibited consistent performance, averaging slightly over 10% returns in the past decade. This not only fosters wealth accumulation but also guarantees a steady 3% dividend yield for investors.
For those seeking extensive diversification in their portfolio through high dividend-paying stocks, VYM is a compelling choice.
VIG: Vanguard Dividend Appreciation Index Fund ETF
VIG is an exchange-traded fund (ETF) from Vanguard that aims to replicate the S&P Dividend Growers Index. The fund’s primary objective is to invest in a portfolio of large-cap companies that have a history of consistently increasing their dividend payments.
Although VIG is similar to the SCHD ETF, it comprises more of companies in the technology sector. Among its top ten holdings are some well-known entities such as Microsoft, Apple, Visa, and Mastercard.
While VIG may not offer the highest dividend yield compared to other ETFs, it currently yields 1.89%, which is relatively low. However, it has a low expense ratio of 0.06% or $6 for every $10,000 invested.
Despite its modest yield, VIG is known for its focus on technology stocks, which positions it well during tech upswings. Over the past decade, it has shown an average performance of 11.09%, ranking it as the third-highest performer. If you’re an investor looking for more tech dividend exposure, VIG is a promising option to consider.
SPHD: Invesco S&P 500 High Div Low Volatility ETF
SPHD is an ETF focused on dividends, tracking the S&P 500 Low Volatility High Dividend Index. It consists of 50 stocks known for their high dividends and stability. With a generous yield of 4.59%, SPHD stands out for its strong returns. However, its 8.60% ten-year average performance lags behind VIG and SCHD. It does come with a higher expense ratio at 0.30%, ranking among the priciest on the list.
For investors keen on large-cap, high-dividend, low-volatility options, SPHD presents a compelling choice. Its dividend yield is notably attractive compared to other ETFs in this category.
HDV: iShares Core High Dividend ETF
HDV is an iShares dividend ETF that follows an index of U.S. equities known for their high dividend payouts. It consists of 75 dividend-paying stocks, with a significant focus on the energy and healthcare sectors, collectively making up more than half of the fund.
With a modest expense ratio of 0.08%, HDV stands out as a cost-effective addition to your investment portfolio. Boasting a noteworthy dividend yield of 4.30%, it is a lucrative option for income-oriented investors.
While the ten-year average performance sits at 8.37%, slightly below other dividend ETFs, HDV remains appealing due to its strong yield. If you prioritize energy and healthcare exposure in your dividend ETF selection, HDV emerges as a top choice. Offering an attractive yield, low expenses, and a respectable return, HDV is a compelling investment opportunity.
NOBL: ProShares S&P 500 Dividend Aristocrats ETF
NOBL stands as the S&P 500 Dividend Aristocrats ETF, aiming to mirror the S&P 500® Dividend Aristocrats® Index performance. This index comprises firms that have raised dividends consistently for 25 years.
For stability-seeking investors, NOBL is a compelling choice. It consists of 67 companies that annually boost their dividends. Despite being a relatively new entrant among dividend ETFs, originating in 2013, NOBL has impressively yielded an 11.34% return since inception, outperforming many rivals.
With a 2.59% yield, NOBL offers an average return compared to other dividend ETFs. However, it carries a 0.35% expense ratio, positioning it as a relatively pricier option in terms of fees. If you seek a dividend ETF aligning with the Dividend Aristocrats, housing firms sustaining 25-year dividend growth, NOBL emerges as a top contender for your investment portfolio.
SDY: SPDR® S&P® Dividend ETF
SDY represents a State Street ETF that tracks the S&P® High Yield Dividend AristocratsTM Index. This index evaluates the performance of high-yield paying constituents of the S&P Composite 1500 Index. Companies included in SDY have consistently increased their dividends over the past two decades.
Stocks are then weighted based on indicated yield (annualized gross dividend payment per share divided by price per share), with adjustments made quarterly. With approximately 121 holdings and an expense ratio of 0.35%, SDY stands as one of the comparatively more expensive ETFs on the list. Sporting a yield of 2.60% and a 10-year average return of 10.48%, SDY emerges as a favorable choice for many investors.
Recognized as one of the premier mid-cap value ETFs, SDY offers investors exposure to companies beyond the realm of the S&P 500. For those looking to diversify their portfolio with mid-cap value ETFs, SDY presents itself as a top dividend ETF option.
Final Thoughts:
There are many dividend ETFs available for investors to choose from, but these seven dividend ETFs stand out and offer investors a variety of investment options that are best suited to their portfolios.
Although there is no definitive answer on the best dividend ETF, several options are available. SCHD offers high dividend growth and an overall average, while SPHD provides a high yield. Any of these options may be appropriate for your investment objectives. Choose one and start your investment journey today.