Dividends are a crucial part of long-term investing success.
It’s easy to forget that by buying stocks, investors become owners of publicly traded companies. Depending on the company, investors can sometimes receive regular cash payments for their commitment, called dividends. Along with appreciation in the company’s share price, dividends form a crucial part of long-term stock market returns. Over time, compounding from regularly reinvested dividend payments can snowball. For example, a hypothetical investor who invested $10,000 in the Vanguard S&P 500 Index Investor Fund (ticker: VFINX) and held it from 1985 to December 2022 would have ended up with a final portfolio value of $181,440 for an annualized return of 7.9%. If this investor reinvested dividend payments on time, their final portfolio value would have been much greater at $514,017, with a higher annualized return of 10.9%. Here are seven of the best high-dividend exchange-traded funds, or ETFs, to buy in 2023.
Schwab U.S. Dividend Equity ETF (SCHD)
Dividend investors looking to target a portfolio of high-quality, large-cap U.S. equities can opt for SCHD, which tracks the Dow Jones U.S. Dividend 100 Index. This index employs a series of screeners to index 104 stocks that have better fundamental strength and sustainability of dividends relative to their peers. Stocks in SCHD must have paid dividends for a minimum of 10 consecutive years. They are then ranked based on a composite score that checks return on equity, dividend yield, five-year dividend growth rate and cash-flow-to-total-debt ratio. Notable top holdings in SCHD include Broadcom Inc. (AVGO), Verizon Communications Inc. (VZ), Cisco Systems Inc. (CSCO), Texas Instruments Inc. (TXN) and BlackRock Inc. (BLK). The ETF charges a low expense ratio of 0.06% and currently pays a 30-day SEC yield of 3.4%.
iShares International Select Dividend ETF (IDV)
A great complement to diversify SCHD is IDV, which tracks high-yielding dividend stocks from outside the U.S. market. Developed countries like the U.K., South Korea, Australia, Japan, Canada, France, Switzerland and Italy have some great companies that are dividend juggernauts. Case in point: IDV’s high 30-day SEC yield of 7.3%, which exceeds that of most U.S. dividend ETFs. Notable international dividend stocks held in IDV include Rio Tinto PLC (RIO), British American Tobacco PLC (BATS.L), Emera Inc. (EMA.TO) and the Bank of Nova Scotia (BNS). If the U.S. market falters, then IDV could potentially pick up the slack. However, the ETF does charge a higher expense ratio of 0.49% due to the greater cost of indexing international equities.
Vanguard High Dividend Yield ETF (VYM)
Some dividend investors may not like SCHD’s concentrated portfolio. For a broader approach to U.S. dividend stocks, investors can buy VYM, which like many Vanguard ETFs offers a combination of minimal fees, high diversification and low turnover. This ETF tracks the FTSE High Dividend Yield Index, which passively screens for 440 domestic stocks with high yields and a large-cap value style. The largest sectors represented in VYM are financial, health care and consumer staples, which gives the ETF some defensive characteristics. With dividends reinvested, VYM only lost 0.4% in 2022, compared with Vanguard S&P 500 ETF’s (VOO) loss of 18.2%. VYM charges a 0.06% expense ratio and currently pays a 3% 30-day SEC yield.
Vanguard Dividend Appreciation ETF (VIG)
Most dividend investors focus on stocks with a high yield. While this approach can maximize current income, it can also result in some drawbacks. Namely, it excludes companies that pay smaller dividends but have a history of dividend growth. Focusing on stocks with a record of growing dividends year over year can be a great way to avoid yield traps, which are high-dividend stocks that are actually stagnating. To implement this, investors can buy VIG, which tracks the S&P U.S. Dividend Growers Index. VIG holds 289 large-cap U.S. stocks, including the likes of UnitedHealth Group Inc. (UNH), Johnson & Johnson (JNJ), Microsoft Corp. (MSFT) and JPMorgan Chase & Co. (JPM). While VIG has a lower 30-day SEC yield of 1.9%, it makes up for it with better growth metrics, such as a 16% earnings growth rate and a 24.8% return on equity. The ETF charges a 0.06% expense ratio.
ProShares S&P 500 Dividend Aristocrats ETF (NOBL)
The term “dividend aristocrat” in the U.S. market refers to stocks that have paid and grown dividends consecutively for at least 25 years. These stocks rank among some of the most profitable and resilient in the market. To target a portfolio of these stocks, investors can buy NOBL, which tracks the S&P 500 Dividend Aristocrats Index. NOBL holds a concentrated portfolio of the current dividend aristocrat stocks in the S&P 500 in an equal-weighted approach. The current list of 64 holdings includes companies like Brown & Brown Inc. (BRO), General Dynamics Corp. (GD), Automatic Data Processing Inc. (ADP) and Archer-Daniels Midland Co. (ADM), making NOBL’s composition very different from a regular S&P 500 index ETF. NOBL currently pays a 30-day SEC yield of 2.12% and charges a 0.35% expense ratio.
SPDR S&P Global Dividend ETF (WDIV)
Dividend investors looking for global diversification can buy WDIV, which tracks the S&P Global Dividend Aristocrats Index. This index screens its holdings for at least 10 consecutive years of increasing or stable dividends and a sustainable payout ratio. Then, the top 100 stocks from around the world with the highest yields meeting these criteria are selected. To ensure diversity, WDIV caps each country’s representation to 20 stocks and each of the 11 stock market sectors’ representation to 35 stocks. Each individual stock is then capped at 3%, with no single country or sector being allowed to exceed 25% of the ETF’s overall weight. The result is a globally diversified portfolio that pays a decent 30-day SEC yield of 4.5%, with an expense ratio of 0.4%.
Global X SuperDividend ETF (SDIV)
Global X is best known for its high-yielding covered-call ETFs, but the firm also has some excellent dividend ETFs to consider. An example is SDIV, which targets 100 of the highest-yielding global dividend stocks. The ETF accomplishes this by tracking the Solactive Global SuperDividend Index. This index is notable in that U.S. dividend stocks only compose about 28% of its current holdings. Notable international markets represented include Brazil at 15.4%, Hong Kong at 11.4% and China at 10.1%, giving this ETF a heavy emerging-market tilt. In terms of sector representation, financials hold the largest weight at 33.2%, with real estate coming in second at 13.3% and materials third at 11.7%. Thanks to its concentration of high-yielding emerging-market stocks, SDIV currently pays a high 30-day SEC yield of 11.6%. However, the ETF is volatile, falling 27.1% in 2022. It also charges a higher expense ratio of 0.58%.
7 of the best high-dividend ETFs:
— Schwab U.S. Dividend Equity ETF (SCHD)
— iShares International Select Dividend ETF (IDV)
— Vanguard High Dividend Yield ETF (VYM)
— Vanguard Dividend Appreciation ETF (VIG)
— ProShares S&P 500 Dividend Aristocrats ETF (NOBL)
— SPDR S&P Global Dividend ETF (WDIV)
— Global X SuperDividend ETF (SDIV)
More from U.S. News
ETF vs. Index Fund: The Difference and Which to Use
How to Invest in Stocks for Beginners
7 of the Best High-Dividend ETFs originally appeared on usnews.com
Update 02/01/23: This story was published at an earlier date and has been updated with new information.
