One of the best ways investors can compound their returns quicker is by reinvesting dividends. While these payments from a company can be withdrawn for income needs, they may offer a substantially higher benefit if investors delay gratification and reinvest them to buy more shares.
For example, the S&P 500’s 10-year performance clocked in at an annualized 10.5% in terms of stock price return as of July 5. However, with all dividends reinvested, the return comes in much higher at 12.7%.
That small difference can snowball over time to improve an investor’s final portfolio value.
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For example, an investor who put $10,000 in an S&P 500 index fund in 1985 would only have a final portfolio value of $210,364 by June 2023 if they did not reinvest dividends. If that investor reinvested dividends, the value by June 2023 would have been nearly three times higher, or $600,419. This snowballing effect is one of the reasons why over long periods of time, investing in dividend-paying equities can be a great way of warding off the eroding effects of inflation.
“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.”
However, picking the right dividend stocks to buy and hold over a long period of time can be difficult. There is a much higher risk of a single dividend stock pick cutting its dividend during a bad economy. As an alternative, investors can choose a dividend exchange-traded fund, or ETF.
“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, 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.”
By combining various dividend ETFs, investors can create a customized portfolio that emphasizes higher than average yields, but still offers high diversification across different sectors and regions.
Here’s a look at seven of the best high-yield dividend ETFs:
| Dividend ETF | “Trailing dividend yield” |
| Vanguard High Yield Dividend ETF (ticker: VYM) | 3.3% |
| Vanguard International High Dividend Yield ETF (VYMI) | 4.6% |
| Schwab U.S. Dividend Equity ETF (SCHD) | 3.8% |
| SPDR S&P Dividend ETF (SDY) | 2.7% |
| SPDR Portfolio S&P 500 High Dividend ETF (SPYD) | 4.9% |
| iShares Core High Dividend ETF (HDV) | 4.1% |
| iShares Select Dividend ETF (DVY) | 3.9% |
Vanguard High Yield Dividend ETF (VYM)
One of the easiest ways for dividend investors to maximize returns over time is by minimizing fees. Like dividend payments, fees can compound, too, which creates a drag on returns. To mitigate this, investors can opt for low-cost Vanguard ETFs like VYM. This ETF tracks the FTSE High Dividend Yield Index, which currently holds over 460 stocks screened for above-average dividend yields.
“With an 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. Right now, the ETF is paying a trailing 12-month yield of 3.3%. It is also available in mutual fund form as the Vanguard High Dividend Yield Index Fund Admiral Shares (VHYAX).
Vanguard International High Dividend Yield ETF (VYMI)
High-yield dividend stocks aren’t just found in the domestic U.S. market. By diversifying internationally, investors can own even more dividend stocks from both developed and emerging market countries. This can hedge against the chance of the U.S. doing poorly, or the risk of the U.S. dollar depreciating. A good pick here is VYMI, which tracks the FTSE All-World ex U.S. High Dividend Yield Index.
“Investors interested in high current income from non-U.S. stocks can consider VYMI, which carries an expense ratio of 0.22%,” Concannon says. “By combining VYM and VYMI, investors can build a globally diversified portfolio of high-yield equities using low-cost index ETFs.” VYMI is also highly diversified, with over 1,300 holdings from countries such as the U.K., Japan, Australia, Canada, China and Brazil.
[READ: 7 Best Emerging-Market ETFs]
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.
By tracking the Dow Jones U.S. Dividend 100 Index, SCHD manages to achieve an above-average trailing 12-month yield of 3.8%, but that’s not all. The ETF’s index also takes extra steps to screen for financial quality by requiring at least 10 years of historical dividend payments, high free cash flow, good return on equity and a sustained five-year dividend growth rate. All this comes with a 0.06% expense ratio.
SPDR S&P Dividend ETF (SDY)
SDY tracks the S&P High Yield Dividend Aristocrats Index, which also uses a rigorous array of screeners. The ETF requires at least 20 consecutive years of dividend increases to find stocks known as “Dividend Aristocrats.” Then, SDY weights the resulting portfolio of 121 stocks by yield, with higher yielding ones weighted higher.
The goal of SDY is to provide exposure to high yields and dividend growth. This can help investors avoid “yield traps,” which are stocks with high dividends but poor fundamentals. SDY’s current portfolio is mainly held in industrials, consumer staples and utilities — three traditionally defensive sectors. The ETF pays a trailing 12-month yield of 2.7% and charges a 0.35% expense ratio.
SPDR Portfolio S&P 500 High Dividend ETF (SPYD)
Investors looking for the lowest fees possible may not like ETFs like SDY, which tend to cost more due to the more rigorous nature of their index. For a simpler approach to dividend stocks, consider SPYD. By tracking the S&P 500 High Dividend Index, this ETF takes the 80 highest yielding dividend stocks in the S&P 500 and puts them in a portfolio.
Unlike SDY, SPYD does not screen for consecutive years of historical dividend payments. The focus is simply on the highest yielding S&P 500 stocks at any given time. In terms of sector exposure, SPYD looks markedly different from SDY, with its largest weightings coming from real estate and financial stocks at 23.3% and 17.7%, respectively. The ETF charges a 0.07% expense ratio and pays a trailing 12-month yield of 4.9%.
iShares Core High Dividend ETF (HDV)
Another low-cost option is HDV, which charges a 0.08% expense ratio. This ETF tracks the Morningstar Dividend Yield Focus Index, which targets 75 high-yield U.S. dividend stocks that have been screened for financial health. The ETF’s top holdings currently include Exxon Mobil Corp. (XOM), Johnson & Johnson (JNJ), Verizon Communications Inc. (VZ) and Chevron Corp. (CVX).
Compared to SPYD, HDV has a much higher allocation to health care and energy sector stocks at 25.5% and 24.6%, respectively. Notable names in the former include AbbVie Inc. (ABBV) and Pfizer Inc. (PFE). Thanks to its high energy sector exposure, the ETF did particularly well in 2022, returning 7.1% with dividends reinvested as inflation and oil prices trended high. HDV pays a trailing 12-month yield of 4.1%.
iShares Select Dividend ETF (DVY)
iShares also offers a more complex alternative to HDV for dividend investors looking for a more stringent ETF in the form of DVY. This ETF tracks the Dow Jones U.S. Select Dividend Index, which tracks 100 U.S. stocks screened for high yields and five years of consecutive dividend payments. However, it clocks in at a higher expense ratio compared to HDV, at 0.38%.
DVY also has a noticeably different portfolio compared to HDV. Its top holdings currently include Altria Group Inc. (MO), Verizon, Ford Motor Co. (F), International Business Machines Co. (IBM) and Philip Morris International Inc. (PM). Environmental, social and governance, or ESG, conscious investors may not like this ETF given that it holds tobacco stocks. DVY pays a 3.9% trailing 12-month yield.
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7 of the Best High-Dividend ETFs originally appeared on usnews.com
Update 07/06/23: This story was previously published at an earlier date and has been updated with new information.
