7 of the best high-dividend ETFs to buy.
Investors seeking a balanced combination of portfolio stability, monthly income and share price appreciation generally turn to dividend stocks. These are shares of large-cap, blue-chip companies in “boring” areas, such as the financial, energy, materials, industrials and consumer staples sectors. Having matured, these companies are often loaded with cash due to ample operating margins and strong economic moats. With only so much innovation to be done at this point in the corporate life cycle, these companies opt to return a portion of their profits to investors in the form of cash payouts called dividends. While investors can hand-pick a portfolio of dividend stocks, this approach does have some risk. Dividends are not guaranteed, and some companies may eliminate them during recessionary conditions. A safer, more diversified approach is to buy a dividend exchange-traded fund, or ETF. Here’s a list of the seven best dividend ETFs to buy today.
Vanguard High Dividend ETF (ticker: VYM)
VYM tracks the FTSE High Dividend Yield Index, which holds a total of 410 stocks characterized by high dividend yields. Like many Vanguard funds, VYM uses a passive approach, holding 410 stocks as dictated by the index’s rules, mostly concentrated in the financials, health care and consumer staples sectors. The top holdings of VYM include many solid U.S. blue-chip stocks, including Johnson & Johnson (JNJ), Procter & Gamble Co. (PG), JPMorgan Chase & Co. (JPM), Exxon Mobil Corp. (XOM) and Home Depot Inc. (HD). VYM is one of the most popular dividend ETFs on the market, with a huge $55.2 billion in assets under management, or AUM. The 30-day SEC yield of the ETF stands at 2.7%, which is respectable given how many holdings it has. Like many of Vanguard’s ETFs, VYM has a cheap expense ratio of just 0.06%, or $6 in fees annually for a $10,000 position.
Vanguard Dividend Appreciation ETF (VIG)
While VYM focuses on holding stocks with higher-than-average dividend yields, VIG takes a different approach, electing to invest in 216 stocks with a track record of increasing dividend payouts every year. If maximizing present-day income is not a concern, focusing on increasing payouts can help your portfolio compound and attain a higher total return. VIG is also more balanced than VYM, with more even allocations between financials, health care, industrials, information technology, consumer staples and consumer discretionary sectors. The largest holdings in VIG are almost identical to VYM, albeit with the inclusion of Microsoft Corp. (MSFT), Visa Inc. (V) and Costco Wholesale Corp. (COST). VIG does have a lower yield of 1.7%, but don’t let this fool you — VIG’s 10-year compound annual growth rate, or CAGR, with all dividends reinvested stands at 12.9%, compared with VYM’s 12.2%. VIG will also cost you a low expense ratio of 0.06% to hold.
Schwab U.S. Dividend ETF (SCHD)
Investors looking for a concentrated dividend play with a value investing tilt should consider SCHD, which tracks the Dow Jones U.S. Dividend 100 Index. Unlike VYM or VIG, SCHD holds just 104 U.S. large-cap stocks. SCHD also boasts a decently low average price-earnings ratio of 17.3, price-cash flow ratio of 13.8 and price-book ratio of 3.8. SCHD has a 10-year CAGR of 14.3% after dividends reinvested, easily beating both VYM and VIG. SCHD currently pays an impressive 3.1% yield and has a low expense ratio of just 0.06%. This combination of winning factors has made SCHD a favorite among dividend investors, allowing it to attract assets AUM of roughly $35 billion so far.
SPDR S&P Dividend ETF (SDY)
SDY tracks the S&P High Yield Dividend Aristocrats Index. In this context, a “dividend aristocrat” refers to an S&P 500 stock that has consistently increased its dividend for at least 20 consecutive years. For investors, dividend aristocrat stocks are highly desirable in a long-term portfolio because they provide growing income streams. SDY holds a total of 119 of these stocks, with the individual allocated weightings based on the stock’s yield. The ETF’s top four sectors are consumer staples, utilities, financials and industrials, with about 15% in each. Top holdings include Exxon, Chevron Corp. (CVX), AbbVie Inc. (ABBV) and International Business Machines Corp. (IBM). SDY’s 10-year CAGR stands at 12.6%, which is similar to both VY and VYG but falls short of SCHD. The current yield is 2.3%. However, SDY has a much higher expense ratio of 0.35%, which makes it nearly six times as pricey as the previous ETFs.
SPDR S&P 500 High Dividend ETF (SPYD)
Investors desiring the name brand recognition and stability of the S&P 500 index should consider buying SPYD. This ETF holds the 80 stocks in the S&P 500 with the highest dividend yields. As opposed to SDY, SPYD does not attempt to track stocks with dividend payout growth or a consecutive streak of dividend increases. Rather, it simply targets the highest-yielding stocks, regardless of their market cap or sector. As a result, SPYD has the highest yield of the ETFs profiled so far, at 3.7%. The ETF is also significantly cheaper than SDY, with an expense ratio of just 0.07%. SPYD is therefore ideal for investors looking to establish the highest possible passive income stream without having to sell off shares.
iShares Core Dividend Growth ETF (DGRO)
If SPYD is too concentrated for your liking, consider buying DGRO, which holds 418 U.S. stocks with a history of consistently growing dividends. However, unlike dividend aristocrats, DGRO’s stocks are not required to post multi-decade streaks of consecutive dividend payouts and payout growth. This allows DGRO to have more holdings, providing it with better diversification. Compared to the previous ETFs, DGRO allocates more to the information technology sector, at 20.2%, with the next-largest sectors being financials and health care. While the information technology sector is not known for high yields, the largest companies do pay dividends and have been steadily increasing them for years. Top holdings in DGRO include Apple Inc. (AAPL), MSFT, JNJ, JPM, Pfizer Inc. (PFE) and Coca-Cola Co. (KO). DGRO has a yield of 2% and an expense ratio of 0.08%. The ETF is popular, having attracted $23.5 billion in AUM.
ProShares S&P 500 Dividend Aristocrats ETF (NOBL)
Last up on this list is NOBL, which tracks the S&P 500 Dividend Aristocrats Index. NOBL has even stricter criteria than SDY, requiring at least 25 consecutive years of dividend payouts and growth. NOBL’s 65 underlying dividend aristocrats are all blue-chip stocks with stable earnings, excellent financial ratios and a strong history of profitability. What’s more interesting is that NOBL opts for a more-or-less equal-weight allocation among its stocks, with its smallest holding being Stanley Black & Decker Inc. (SWK) at 1.2% and its largest holding being Nucor Corp. (NUE) at 2.4%. This gives NOBL excellent diversification from concentration risk, ensuring that no single company can overly influence the ETF. NOBL is also more concentrated in consumer staples and industrials, with each sector garnering a roughly 20% weighting. Less is allocated to the financials and energy sectors. The yield of the ETF is 1.9%, while the expense ratio sits at 0.35%.
7 of the best high-dividend ETFs:
— Vanguard High Dividend ETF (VYM)
— Vanguard Dividend Appreciation ETF (VIG)
— Schwab U.S. Dividend ETF (SCHD)
— SPDR S&P Dividend ETF (SDY)
— SPDR S&P 500 High Dividend ETF (SPYD)
— iShares Core Dividend Growth ETF (DGRO)
— ProShares S&P 500 Dividend Aristocrats ETF (NOBL)
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Update 04/14/22: This story was published at an earlier date and has been updated with new information.