Picking the right dividend stocks is no easy task. First, you have to find a company that pays a decent yield that is better than the typical S&P 500 constituent. Then, you have to make sure that dividend is sustainable and, in the best of worlds, growing steadily. Even if you find these two factors, you then have to try to make sure that you have a stock that is going to move higher in the long term.
Some companies simply cannot live up to these expectations. One great example is Hanesbrands Inc. (ticker: HBI). The struggling apparel company just announced it would eliminate its dividend to focus on paying down debt, leading to a 62% drop in share prices in the last year through Feb. 14.
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So why risk this kind of mayhem with individual dividend stocks when you can buy a diversified portfolio of income investments in one single holding?
That’s what dividend exchange-traded funds, or ETFs, offer, as they give investors access to a collection of companies through one purchase. These products come in different shapes and sizes, but all offer more stability than you’ll find in single stock investments.
Here are seven of the best dividend ETFs to consider if this strategy appeals to you:
— Vanguard Dividend Appreciation ETF (VIG)
— Vanguard High Dividend Yield ETF (VYM)
— iShares Core Dividend Growth ETF (DGRO)
— ProShares S&P 500 Dividend Aristocrats ETF (NOBL)
— WisdomTree U.S. MidCap Dividend ETF (DON)
— Global X SuperDividend ETF (SDIV)
— Invesco S&P 500 High Dividend Low Volatility ETF (SPHD)
Vanguard Dividend Stock ETFs Lead Wall Street
The best place to start if you’re looking for the best dividend ETF is the Vanguard Dividend Appreciation ETF (VIG). This is the largest such ETF on Wall Street, with a massive $66 billion in assets under management. And as is typical of Vanguard’s low-cost index funds, it is dirt cheap at just 0.06% in annual expenses, or a mere $6 per year on every $10,000 you invest.
The trade off, however, is that this fund isn’t particularly sophisticated. VIG holds about 290 top dividend stocks in the U.S., led by insurance giant UnitedHealth Group Inc. (UNH), megabank JPMorgan Chase & Co. (JPM) and tech giant Microsoft Corp. (MSFT), among others. These are all big stocks, with a median market cap of $150 billion across all holdings. Unfortunately, the biggest stocks on Wall Street aren’t always the most generous, as VIG yields just 1.9% — only moderately higher than the roughly 1.6% average yield for the S&P 500.
As an alternative, consider the Vanguard High Dividend Yield ETF (VYM), with about $51 billion in assets. It’s as cheap as the prior fund, at just 0.06% in annual expenses. And as the name implies, it tilts toward higher-yield offerings.
The portfolio is actually larger, however, not smaller. There are about 440 components led by many of the same blue-chip names as the prior fund. But the deeper list of holdings allows VIG to go into smaller and slightly riskier stocks that pay a bigger dividend. The result is a higher yield.
Of course, if all you want is large and recognizable dividend stocks, there are plenty of ETFs with a few billion in assets that can accommodate you beyond these leading Vanguard funds. But if you’re looking to get a bit more tactical with your dividend ETF investment, consider one of the following five other options.
iShares Core Dividend Growth ETF (DGRO)
This iShares fund is well established, with about $24 billion in assets. It focuses not just on dividend stocks but also companies with strong payment records that have grown over the last five years. Furthermore, it screens for dividend stocks that aren’t currently paying out more than 75% of total profits, and therefore are likely to keep growing those payouts in the future. That makes a list of about 450 stocks which includes many big-name companies in the prior funds, but also kicks out the riskier ones on the list. The yield isn’t tremendous, but if you are focused on the quality of dividends as well as the quantity, then DGRO is worth a look.
ProShares S&P 500 Dividend Aristocrats ETF (NOBL)
If you like consistency in your payouts, then take note of this fund that focuses on “dividend aristocrats.” This term refers to companies that have increased their dividend payouts for 25 consecutive years or more. That’s an eternity on Wall Street, as the last 25 years span not just the pandemic and war in Ukraine but also the financial crisis and even the dot-com boom and bust. That proves that the components have great pedigrees as income stocks, along with consistent operational success to support this kind of commitment to profit-sharing with stockholders. To be clear, this doesn’t mean every payday is a huge one, as there are better yields out there. But the roughly 65 picks that make up this fund do offer stability and consistency over the long haul.
WisdomTree U.S. MidCap Dividend ETF (DON)
Another interesting way to pursue dividend stocks is this $3.5 billion WisdomTree fund that excludes both the biggest stocks and the smallest, riskiest stocks. This focus provides a portfolio of “Goldilocks” dividend payers that are neither too big nor too small. After all, if you have other large-cap funds like a vanilla S&P 500 index ETF, why do you need more exposure to the same blue chips? Instead, DON allows you to add about 350 stocks in the next tier down that you may not already own in other positions. These are stocks such as International Paper Co. (IP
) and entertainment stock Paramount Global (PARA). The yield is slightly better than some of the large-cap dividend ETFs out there, so you won’t be settling for smaller dividends even if you go after smaller companies.
Global X SuperDividend ETF (SDIV)
As you could have guessed from the “SuperDividend” brand, this dividend ETF prioritizes yield to generate a payout more than four times that of the typical S&P 500 stock. That reward does come with greater risk, of course, as the portfolio of stocks includes international names like Singapore-based LNG shipping company BW LPG Ltd. (BWLLF). In fact, only about 30% are U.S. companies, with 15% of the portfolio based in China and 14% in Brazil. But there’s strength in numbers, and the idea is that roughly 100 of these names will be diversified enough to prevent undue volatility if one or two of these lesser dividend stocks hits a snag. Besides, a look at the jaw-dropping yield should be all the incentive you need if you’re not afraid to take on a bit more risk in your dividend ETFs.
Invesco S&P 500 High Dividend Low Volatility ETF (SPHD)
The $4 billion SPHD fund is unique in that it prioritizes both income as well as lower volatility investments that should be more stable than their peers. The portfolio focuses on just 50 stocks that exhibit lower share price volatility over the last 12 months when compared with other stocks, resulting in a diverse group of companies that range from traditional large-cap income plays such as tobacco giant Altria Group Inc. (MO
) and telecom giant AT&T Inc. (T) to lesser-known small-caps. With a yield that’s more than two times the typical stock in the S&P 500 index and a lower risk profile, this is a quirky but potentially valuable dividend ETF worth a look.
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7 Best Dividend ETFs to Buy Now originally appeared on usnews.com
Update 02/15/23: This story was previously published at an earlier date and has been updated with new information.