The total returns earned by stock investors usually come from a combination of two sources: capital appreciation in the stock’s share price, and periodic payments made to shareholders, called dividends. The latter plays an important, but often overlooked, role in compounding long-term returns.
Consider the benchmark S&P 500 index. From Dec. 31, 1984, to April 30, 2023, the index returned about 8.1% in price alone.However, with dividends reinvested, the total return for this period increased to 11.1%, thus underscoring the importance of dividends when it comes to investment returns.
However, investors don’t have to reinvest dividends. While doing so can boost compounding, withdrawing dividends can be an excellent way of funding passive income needs, such as for retirement.
“Dividend stocks have a long history of providing rising income over time, which helps retirees combat rising inflation,” says David James, managing director and advisor at Coastal Bridge Advisors. “Rising dividend income protects the purchasing power of retirees’ dollars and allows greater spending power and flexibility.”
For this role, investors may wish to focus on exchange-traded funds, or ETFs, that hold high-yield dividend stocks based on an index or some form of rules-based methodology.
“A high-yield dividend ETF invests in dividend-paying stocks with the primary objective of providing a higher yield than that of the broader stock market,” says Michael Collins, financial advisor and founder and CEO at WinCap Financial. “It is a way for investors to access a diversified portfolio of income-generating assets without having to actively manage their own investments.”
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The main benefit of this approach is a higher degree of diversification than can be attained compared to picking individual high-yielding dividend stocks. “It’s important to own a broad selection of dividend-producing securities, and this means diversifying domestically and internationally,” James says.
Here’s a look at seven of the best high-yield dividend ETFs on the market right now:
| ETF | Dividend Yield |
| iShares Core High Dividend ETF (ticker: HDV) | 3.9% |
| Vanguard High Yield Dividend ETF (VYM) | 3.1% |
| Vanguard International High Dividend Yield ETF (VYMI) | 4.4% |
| Invesco S&P 500 High Dividend Low Volatility ETF (SPHD) | 4.1% |
| Franklin International Low Volatility High Dividend Index ETF (LVHI) | 7.3% |
| Schwab U.S. Dividend Equity ETF (SCHD) | 3.6% |
| SPDR Portfolio S&P 500 High Dividend ETF (SPYD) | 4.5% |
iShares Core High Dividend ETF (HDV)
“When looking at high-yield dividend ETFs, there are a few important things to consider,” says Eliza Arnold, co-founder and CEO at Arnie.co, a full-service 401(k)
provider. In particular, Arnold recommends assessing the ETF’s expense ratio, underlying index and portfolio turnover to understand the annual fee, investment holding and the miscellaneous costs and tax characteristics of the ETF.
When it comes to these metrics, Arnold suggests looking for a combination of lower expense ratios, companies with consistent dividend payments, and minimal turnover. An ETF that fits these criteria is HDV, which provides exposure to 75 U.S. stocks by tracking the Morningstar Dividend Yield Focus Index. The ETF charges a 0.08% expense ratio, or $8 annually per $10,000 invested, and is very efficient due to its passive indexing strategy.
12-month trailing dividend yield: 3.9%
Vanguard High Yield Dividend ETF (VYM)
High-yield dividend investors looking to minimize costs even further can consider VYM, which offers low fees like many of Vanguard’s ETFs. “With an annual expense ratio of just 0.06%, VYM can appeal to income-oriented investors who want a low-cost, broadly diversified index option for high current income from U.S. stocks,” says Molly Concannon, head of equity product at Vanguard.
By passively tracking the FTSE High Dividend Yield Index, VYM provides investors with exposure to over 460 U.S. stocks that currently pay or are forecast to pay above-average dividend yields. Another quirk of VYM is its ability to potentially act as an ETF for value stock
exposure. Currently, the ETF fits into the “large value” category, meaning it’s composed primarily of large-cap value stocks.
12-month dividend yield: 3.1%
Vanguard International High Dividend Yield ETF (VYMI)
“Investors interested in high current income from non-U.S. stocks can consider VYMI, which carries an expense ratio of 0.22%,” Concannon says. This ETF offers exposure to high-yield dividend stocks from both international developed and emerging markets. “By combining VYM and VYMI, investors can build a globally diversified portfolio of high-yield equities using low-cost index ETFs,” Concannon says.
The majority of this ETF is dominated by stocks from developed-market countries, including the U.K., Japan, Australia, Canada, Germany, France and Switzerland, to name a few. Emerging markets such as China, Taiwan and Brazil make up around 22% of VYMI. By buying VYMI, investors can hedge against the potential of the U.S. market underperforming for an extended period.
12-month dividend yield: 4.4%
[SEE: 7 High-Yield ETFs for Income Investors]
Invesco S&P 500 High Dividend Low Volatility ETF (SPHD)
Investors looking for a more balanced mix of risk and return when it comes to high-yield dividend ETFs may like SPHD. This ETF targets about 50 stocks from the S&P 500 index that have historically displayed a combination of higher-than-average yields and lower-than-average volatility. The goal of SPHD is to ensure a high level of income while minimizing fluctuations from the market’s gyrations.
In practice, this results in a portfolio that is concentrated in two traditionally defensive market sectors: utilities and consumer staples. Both of these sectors benefit from inelastic demand for their goods and services, which can help reduce earnings and share price fluctuations. However, SPHD’s more complex methodology results in a higher expense ratio of 0.3%.
12-month dividend yield: 4.1%
Franklin International Low Volatility High Dividend Index ETF (LVHI)
“High-yield dividend ETFs may help investors with risk management during times of heightened market instability or protracted downturns,” says Michael LaBella, head of sustainable portfolio solutions at Franklin Templeton. To complement SPHD, investors can go international with LVHI, which screens for high-dividend, low-volatility stocks from international developed markets.
“LVHI can benefit investors who want income but are concerned about the volatility associated with traditional equity income investments,” LaBella says. “This ETF targets international equities with high dividends, low volatility and sustainable earnings.” LVHI also features caps on individual stocks, sectors and country weightings to ensure diversification. The ETF charges a 0.4% expense ratio.
12-month dividend yield: 7.3%
Schwab U.S. Dividend Equity ETF (SCHD)
“For some of our accounts, we use SCHD because the ETF invests in stocks that have relatively attractive dividend yields but also high return on equity, a track record of dividend growth, limited levels of debt and higher-quality business models with reasonable valuation multiples,” says Christopher Conway, senior portfolio manager at GYL Financial Synergies.
The Dow Jones U.S. Dividend 100 Index tracked by SCHD goes beyond screening for high dividend yields by also checking for quality factors. Notable metrics checked include a requirement for 10 consecutive years of dividend payments and sufficient free cash flow relative to total debt, a solid return on equity and a meaningful five-year dividend growth rate. The ETF tops this off by charging a reasonable expense ratio of 0.06%.
12-month dividend yield: 3.6%
SPDR Portfolio S&P 500 High Dividend ETF (SPYD)
Looking for the name-brand recognition of the venerable S&P 500? For a twist, consider SPYD, which plucks out around 80 of the highest-yielding stocks in the S&P 500. The result is a portfolio that differs markedly from the composition of the S&P 500. For one, SPYD significantly underweights technology
and communication sector stocks due to the relative lack of high-yielding dividend payers in those sectors.
On the other hand, investors who prefer a higher concentration of real estate, financial and utility sector equities will like SPYD given that the ETF is weighted more heavily toward these three sectors at 22%, 17% and 14%, respectively. With an expense ratio of 0.07%, SPYD also remains competitive in terms of fees when compared to previous options like VYM, SCHD and HDV.
12-month dividend yield: 4.5%
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7 of the Best High-Dividend ETFs originally appeared on usnews.com
Update 05/23/23: This story was previously published at an earlier date and has been updated with new information.
