Long-term investors can benefit from dividend ETFs.
As we enter the final months of another strong year for stocks, many investors remain focused on the opportunities for growth-oriented stocks in the health care and technology sectors. However, it’s important to acknowledge that steady income via dividends is a way to provide additional gains in your portfolio over the long term and add a measure of stability along the way to smooth out volatility in share prices. And thanks to the wide array of exchange-traded funds out there, small-time investors can put money in a diversified lineup of dividend stocks with greater ease than ever before. If you’re the kind of investor who’s leery of going “all in” on a single growth stock and would prefer a diversified approach to income investments, consider these top dividend ETFs as part of your portfolio.
Vanguard Dividend Appreciation ETF (ticker: VIG)
A leader among the substantial dividend ETFs on this list, Vanguard’s flagship equity income fund commands an impressive $65 billion in assets under management at present, spread across some 270 or so top dividend investments. These include tech giant Microsoft Corp. (MSFT), megabank JPMorganChase & Co. (JPM) and health care icon Johnson & Johnson (JNJ) to name a few. It’s assuredly biased toward larger stocks, with a median market capitalization of more than $150 billion across these stocks, but for low-risk dividend investors that may not be seen as much of a detriment as these large stocks tend to be more stable over the long term.
Current yield: 1.6%
Vanguard High Dividend Yield Index ETF (VYM)
Another massive Vanguard dividend ETF, VYM boasts roughly $40 billion in assets. Its portfolio differs in that it focuses on stocks paying a bit more than the prior fund, with a list of more than 400 total components that add up to nearly twice the total yield of VIG. Less generous tech stocks such as MSFT are out, and some smaller consumer staples and energy names are in, but collectively this diversified lineup of dividend stocks is still a great foundational option for investors.
Current yield: 2.8%
Schwab U.S. Dividend Equity ETF (SCHD)
One of the cheapest dividend ETFs out there is SCHD, which charges just 0.06% annually in fees, or a mere $6 on every $10,000 invested. It doesn’t shortchange investors on yield, however, with a bigger yield than the prior funds. This higher yield is achieved through a more focused list of just 100 or so total stocks, but interestingly enough it is not any more top heavy than some of the prior funds that may have more total components but are heavily weighted toward the 10 or 15 largest stocks. No single stock is worth more than about 4% of the portfolio of SCHD at present to ensure the risk profile isn’t jumping up significantly even if the yield is.
Current yield: 3%
SPDR S&P Dividend ETF (SDY)
The roughly $20 billion SDY fund is a bit pricier than some of the other funds on this list, in part because it too takes a more focused and curated approach to dividend stocks. Though similar to the Schwab fund, it also has fewer holdings than most with just 110 or so components. SDY doesn’t have more than roughly 3% or so in a single holding and regularly rebalances to keep it that way. Atop the list are higher-yielding stocks, too, including telecom AT&T Inc. (T) and Exxon Mobil Corp. (XOM) which results in a higher overall yield than some other dividend ETFs out there.
Current yield: 2.5%
iShares Core Dividend Growth ETF (DGRO)
Taking a different approach, DGRO is a $20 billion dividend ETF with a portfolio of about 400 different stocks that exhibit a history of sustained dividend growth — and not just current payments. This is a very important distinction in the wake of the pandemic, where some troubled companies had to cut back or altogether eliminate their dividends last year and have only recently started paying them again. The yield is admittedly lower, but that’s in part because some of these stocks like Apple Inc. (AAPL) don’t have big current payments, but do have a strong history of growth in distributions. If you’re a long-term investor, this is very appealing because you can depend on bigger dividends down the road above the already higher-than-average yield DGRO offers when compared with the 1.3% payout of the S&P 500 index at present.
Current yield: 2.1%
ProShares S&P 500 Dividend Aristocrats ETF (NOBL)
Taking the dividend growth strategy one step further is this ProShares ETF that focuses on so-called “dividend aristocrats.” These are companies that have increased their dividend payouts for 25 consecutive years or more, proving they have a great pedigree as income stocks and tremendous long-term potential. Big names like pharmaceutical giant Abbvie Inc. (ABBV) and fast food icon McDonald’s Corp. (MCD) make the list, but so do smaller picks like water heater manufacturer A.O. Smith Corp., (AOS) to create a small but diverse list of about 65 dividend stocks with a rich history of increasing their payouts.
Current yield: 1.9%
iShares International Select Dividend ETF (IDV)
Last but not least is this $4 billion iShare fund that is one of the leading international dividend ETFs and can provide a bit of geographic diversification to your portfolio. It only includes stocks of companies located outside the U.S., making it an ideal companion to an existing portfolio of domestic stocks. And lest you worry you are trading the stability of U.S. blue chips for unproven international names, IDV is populated with companies you’re surely familiar with like U.K. pharma giant GlaxoSmithKline PLC (GSK), Royal Dutch Shell PLC (RDS.A) and British American Tobacco PLC (BTI) that are just as stable as their U.S. peers. As the yield indicates, these stocks often pay significantly higher dividends as well.
Current yield: 4.4%
7 Best Dividend ETFs to Buy Now
— Vanguard Dividend Appreciation ETF (VIG)
— Vanguard High Dividend Yield Index ETF (VYM)
— Schwab U.S. Dividend Equity ETF (SCHD)
— SPDR S&P Dividend ETF (SDY)
— iShares Core Dividend Growth ETF (DGRO)
— ProShares S&P 500 Dividend Aristocrats ETF (NOBL)
— iShares International Select Dividend ETF (IDV)
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