Reinvesting dividends is key to higher returns.
Investors love dividend payments, and there’s a good mathematical reason for favoring them. Over long periods of time, reinvesting dividends plays a strong role in compounding total returns. Case in point, from 1985 through Nov. 30, 2022 the Vanguard S&P 500 Index Investor fund (ticker:VFINX ) returned an annualized 11.1% with dividends reinvested. Without dividends reinvested, the total annualized return is just 8.1%. Aside from maximizing long-term returns, dividends can also be a crucial component of a retiree’s income stream. In a taxable account, qualified dividends from some U.S. companies are taxed at the lower long-term capital gains rate rather than the higher ordinary income rate, which is highly advantageous. While investors can buy individual dividend stocks, a more diversified approach might be via an exchange-traded fund, or ETF. Here are seven of the best dividend ETFs to buy right now.
Vanguard High Dividend Yield ETF (VYM)
A straightforward, no-frills, low-cost dividend ETF is VYM. This ETF tracks the FTSE High Dividend Yield Index, which targets U.S. stocks forecast to have above-average dividend yields. Like many Vanguard ETFs, it’s passively managed, with holdings determined by the indexing organization as opposed to a fund manager making their own picks. VYM mostly consists of financial sector stocks at 20% and health care stocks at 15%, with consumer staples stocks coming in third at 12%. Currently, the largest five holdings include Exxon Mobil Corp. (XOM), Johnson & Johnson (JNJ), JPMorgan Chase & Co. (JPM), Chevron Corp. (CVX) and Procter & Gamble Co. (PG). VYM has a 30-day SEC yield of 2.9%, which is the projected annualized yield an investor would receive based on a trailing-30-day period. VYM costs an expense ratio of 0.04%, or $4 annually per $10,000 invested.
Schwab U.S. Dividend Equity ETF (SCHD)
For a more concentrated play on U.S. dividend stocks, investors can buy SCHD, which tracks the Dow Jones U.S. Dividend 100 Index. While VYM focuses on dividend stocks with high projected yields, SCHD targets dividend stocks with quality fundamentals and a strong history of dividend payments. Thus, the ETF is more concentrated than VYM, with 103 holdings compared to 449. Its current top holdings include Merck & Co. Inc. (MRK), International Business Machines Corp. (IBM) and Amgen Inc. (AMGN). Unlike VYM, SCHD contains a sizable allocation to information technology stocks at 21%, albeit just ones that pay a sizable dividend like Texas Instruments Inc. (TXN). SCHD has a 30-day SEC yield of 3.4% and an expense ratio of 0.06%.
WisdomTree Emerging Markets Small Cap Dividend Fund (DGS)
Both SCHD and VYM target large-cap U.S. dividend stocks. Investors can also look to international markets for dividend stocks. Adding these stocks can provide diversification, as their correlation with the U.S. market can be lower. A great option here are emerging-market dividend stocks, particularly small-cap ones. Buying these stocks individually can be hard, so an ETF like DGS can be beneficial. DGS holds small-cap dividend stocks from emerging markets, and screens them for dividend growth and profitability to ensure quality. DGS has a high 30-day SEC yield of 5.6%, but also costs a higher expense ratio of 0.58%.
iShares International Select Dividend ETF (IDV)
Some investors might find emerging markets too volatile for their liking. Another option for international diversification is developed-market dividend stocks from countries like Canada, the U.K., France, Japan and Australia. Using an ETF like IDV can be a good way of buying these stocks without converting currency or using American depositary receipts. IDV tracks the Dow Jones EPAC Select Dividend Index, which currently tracks 103 developed-market dividend stocks like Rio Tinto PLC (RIO), Zurich Insurance Group AG (ZURN.SW), British American Tobacco PLC (BATS.L), Emera Inc. (EMA.TO), Canadian Utilities Ltd. (CU.TO) and the Bank of Nova Scotia (BNS). The ETF currently pays a 30-day SEC yield of 7.6% and costs an expense ratio of 0.49%.
Vanguard Dividend Appreciation ETF (VIG)
Because VYM screens stocks mainly for a high projected dividend, it can exclude some dividend-paying companies with small yields but a history of strong growth. For example, companies like Microsoft Corp. (MSFT), Visa Inc. (V) and Mastercard Inc. (MA) might not have the highest yields, but they have a history of consistently growing their dividend and also have seen strong share price appreciation. Investors who wish to target these dividend growth stocks can buy VIG, which tracks the S&P U.S. Dividend Growers Index and holds all three of the aforementioned companies plus 286 more. VIG has a 30-day SEC yield of 1.9% and a 0.06% expense ratio.
SPDR Portfolio S&P 500 High Dividend ETF (SPYD)
If you’re a fan of the S&P 500 index, SPYD could be a great way of betting on the highest-yielding stocks in the index. This approach removes a lot of technology sector stocks due to their low or non-existent dividends. What’s left in SPYD is just 80 dividend stocks. Interestingly, the fund does not employ traditional market-cap weights. Its current top holding, Principal Financial Group Inc. (PFG), is weighted at 1.7%, whereas its smallest holding, Lumen Technologies Inc. (LUMN), is weighted at 0.7%. All of the 78 other stocks fall somewhere in between. Compare this to the regular S&P 500 index, where Apple Inc. (AAPL) accounts for 7%. SPYD pays a 30-day SEC yield of 4.5% and costs an expense ratio of 0.07%.
Invesco S&P 500 High Dividend Low Volatility ETF (SPHD)
Dividend investors looking for lower risk could consider SPHD, which targets 50 stocks from the S&P 500 index screened for high dividend yields and low volatility. For the latter, this means selecting stocks with a low beta, a measure of a stock’s sensitivity relative to the broader market. Most of SPHD is composed of consumer staples and utilities stocks, which have traditionally been considered defensive sectors thanks to their consistent demand regardless of the economic cycle. Top holdings include Kinder Morgan Inc. (KMI), Altria Group Inc. (MO), AT&T Inc. (T) and Gilead Sciences Inc. (GILD). SPHD has a 30-day SEC yield of 4.5% and has an expense ratio of 0.3%.
7 of the best high-dividend ETFs:
— Vanguard High Dividend Yield ETF (VYM)
— Schwab U.S. Dividend Equity ETF (SCHD)
— WisdomTree Emerging Markets Small Cap Dividend Fund (DGS)
— iShares International Select Dividend ETF (IDV)
— Vanguard Dividend Appreciation ETF (VIG)
— SPDR Portfolio S&P 500 High Dividend ETF (SPYD)
— Invesco S&P 500 High Dividend Low Volatility ETF (SPHD)
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Update 12/02/22: This story was previously published at an earlier date and has been updated with new information.