Amid volatility, dividend ETFs still deliver.
As we look ahead to the second half of 2022, most investors are not thinking about swinging for the fences via aggressive plays in high growth sectors. Instead, we’re all looking for walks and singles. Dividend exchange-traded funds, or ETFs, are a great foundational investment in times like these because they offer slow and steady returns via consistent income. It’s also worth noting that every company that pays a dividend has to have significant and stable profits in the first place, or else they wouldn’t be able to finance those distributions. You may not hit any home runs with a strategy like this, which tend to be sleepier investments in health care or consumer products. However, dividend ETFs may be just what your portfolio needs to avoid striking out right now. All dividends are calculated on a trailing-twelve-month basis, or TTM.
Vanguard Dividend Appreciation ETF (ticker: VIG)
While the yield isn’t quite as impressive as some of the other offerings on this list, you have to start any lineup of dividend ETFs with this massive Vanguard fund. VIG is the leader in the space as measured by size, with a massive $63 billion in assets at present to make it one of the top 15 exchange-traded products in the U.S. Part of this product’s popularity comes from its very low fee structure, with just 0.06% in annual expenses or a mere $6 per year on every $10,000 you invest. Another reason is the elegantly simple approach, where this dividend ETF relies on the largest 250 or so dividend payers in the U.S. The combination of a low-cost approach hooked up to the most popular stocks on Wall Street adds up to a powerful core holding for almost any portfolio.
Dividend yield (TTM): 1.9%
Schwab US Dividend Equity ETF (SCHD)
If you want a leading large-cap dividend ETF but are looking for a bit more yield, consider this Schwab fund that offers the same affordability of Vanguard but a more focused approach to drive higher yield. This fund also charges just 0.06% annually in fees, and it’s well established with about $36 billion in assets. SCHD boasts a shorter list of 100 holdings and a bias toward more generous stocks like Big Pharma mainstay Merck & Co. Inc. (MRK) instead of the stingier Big Tech names like Microsoft Corp. (MSFT) that you’ll find at the top of the prior Vanguard fund. Thanks to this approach, you’ll tap into double the yield offering by straightforward S&P 500 index funds at present. Just be warned that about 40% of SCHD’s assets are in the top 10 positions alone, thanks to its weighting, which may result in some extra volatility if one of these stocks stumbles.
Dividend yield: 2.9%
iShares Select Dividend ETF (DVY)
Splitting the difference is this iShares offering, which commands $23 billion in assets at present and also has a list of about 100 stocks. However, it takes a more balanced approach with only about 19% weighting toward its top 10 positions to provide a smoother ride. It also layers on a screening methodology that doesn’t just demand decent yield but also features five or more years of consecutive dividends paid to shareholders — meaning you won’t get stocks that recently cut distributions during the pandemic, or for other reasons. The result is a high-quality ETF, where shares have climbed about 6% since Jan. 1 even as the rest of the market has melted down.
Dividend yield: 2.9%
Global X SuperDividend ETF (SDIV)
The prior funds all offer above-average yield. But if you really want to blow the doors off with a big payday, consider this Global X dividend ETF that yields more than three times the prior dividend ETFs. With only about $820 million under management, it’s not particularly massive, but is still large enough to offer a stable and liquid investment vehicle. You’ll be looking far afield from the typical blue-chip dividend stocks, however, with names like Chinese real estate player Logan Property Holdings Co. (3380:HK) and Brazilian utility CPFL Energia SA (CPFE3:BR) among its nearly 100 holdings. There’s clearly more risk in this strategy, but also a heck of a lot more yield.
Dividend yield: 11.1%
iShares International Select Dividend ETF (IDV)
If you like the big payouts you get overseas but would prefer to not lurk in the small corners of China and Brazil to get them, then consider this iShares fund. With $5 billion in assets under management, it focuses only on the large income investments outside the U.S. including $120 billion London-based mining giant Rio Tinto Group PLC (RIO) and Japanese shipping giant Nippon Yusen (NPNYY). Developed markets make up the vast majority of holdings in IDV, including the U.K. stocks leading the portfolio with 22% of assets followed by South Korea (9%), Australia (8%) and Spain (8%).
Dividend yield: 5.4%
iShares Mortgage Real Estate ETF (REM)
Taking a different approach to tap into bigger yield, you can stick with domestic dividend stocks to increase your payday if you decide to exclude some of the more miserly sectors and instead focus on income-oriented ones. This iShares fund takes that strategy, relying on real estate firms — specifically, mortgage-related stocks that deal in financing. The 30 or so stocks in this fund, such as Annaly Capital Management Inc. (NLY) and Starwood Property Trust Inc. (STWD), pay significantly higher yields than most other U.S. stocks. And while some analysts worry higher rates and increased borrowing costs could create headwinds, REM has actually outperformed the broader indexes this year, even as it has delivered much higher dividends along the way.
Dividend yield: 6.8%
Alerian MLP (AMLP)
One last portion of the dividend ETF universe worth a look is the energy sector. Now, many Big Oil stocks and small-cap explorers have been surging in 2022 — but keep in mind that’s a function of expensive crude oil, and history shows these kinds of uptrends may not last. Instead, income-oriented investors should look toward a piece of the sector that includes master limited partnerships, or MLPs. These stocks are among the most reliable income investments you can tap into because they operate pipeline and storage companies and thus are more insulated from commodity price volatility. While AMLP has a very focused list of less than 20 total holdings, these targeted midstream energy stocks offer up big dividends on top of share appreciation of about 25% so far in 2022.
Dividend yield: 7.2%
7 best dividend ETFs to buy now:
— Vanguard Dividend Appreciation ETF (VIG)
— Schwab US Dividend Equity ETF (SCHD)
— iShares Select Dividend ETF (DVY)
— Global X SuperDividend ETF (SDIV)
— iShares International Select Dividend ETF (IDV)
— iShares Mortgage Real Estate ETF (REM)
— Alerian MLP (AMLP)
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Update 06/07/22: This story was published at an earlier date and has been updated with new information.