The U.S. Federal Reserve increased its key interest rate a total of 11 times between March 2022 and July 2023. And while the central bank hasn’t made additional increases lately — and some think it may even move toward cuts soon — the bottom line is that the current rate environment makes fixed-income instruments much more attractive than most dividend stocks.
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Consider that the average yield of a stock in the S&P 500 index of the largest U.S. companies is just 1.7% at present, while 10-year U.S. Treasury bonds provide 4.7% or so.
As a result, finding the “best” dividend ETFs for your portfolio is a question of assets and strategy as much as it is a question of yield. There are some funds that pay well from an income perspective but don’t offer the same upside of dividend stocks, and some that pay more modest yield but come with a lot more stability.
The following seven ETFs all offer various ways to invest for yield, and provide a good look at the options out there for income-oriented investors right now:
| Dividend ETF | Assets under management | Expense ratio | Dividend yield |
| Vanguard Dividend Appreciation ETF (ticker: VIG) | $79 billion | 0.06% | 1.8% |
| Vanguard High Dividend Yield Index ETF (VYM) | $55 billion | 0.06% | 2.8% |
| Vanguard Real Estate ETF (VNQ) | $34 billion | 0.12% | 4% |
| iShares International Select Dividend ETF (IDV) | $4.2 billion | 0.51% | 6.6% |
| Global X SuperDividend ETF (SDIV) | $760 million | 0.58% | 11.8% |
| JPMorgan Equity Premium Income ETF (JEPI) | $33.8 billion | 0.35% | 7.6% |
| iShares Preferred & Income Securities ETF (PFF) | $14.8 billion | 0.46% | 6.3% |
Vanguard Dividend Appreciation ETF (VIG)
— Assets under management: $79 billion
— Expense ratio: 0.06%, or $6 per year on every $10,000 invested
— Dividend yield: 1.8%
When it comes to dividend ETFs, the place to start is this leading Vanguard fund, which is the largest dividend stock fund by assets. It’s also among the very cheapest funds as measured by its annual expenses. The drawback, of course, is that it yields less than 2% in full thanks to a focus on large and high-quality stocks that may not be the most generous dividend payers out there. For instance, VIG holds roughly 310 top dividend stocks in the U.S., but is led by tech giants Microsoft Corp. (MSFT) and Apple Inc. (AAPL) — two stocks that pay less than 0.8% in dividends at present. You’ll get nice exposure to blue chips via VIG, but just make sure you understand the word “dividend” in the title may just be a formality considering the alternatives out there.
Vanguard High Dividend Yield Index ETF (VYM)
— Assets under management: $55 billion
— Expense ratio: 0.06%, or $6 per year on every $10,000 invested
— Dividend yield: 2.8%
This sister fund to VIG steps up the yield to a more respectable level. It offers almost the same scale and exactly the same rock-bottom expense ratio, but with an expanded portfolio of about 460 total stocks and a focus on companies with a history of paying higher-than-average yields. At the moment, top holdings include Big Oil firm Exxon Mobil Corp. (XOM) and mega-bank JPMorgan Chase & Co. (JPM), which yield 3.2% and 2.5%, respectively. You’re giving up the bias toward tech, with that sector only at 11% versus 22% in the prior fund, but you get more income potential in the process.
[READ: 7 Best Actively Managed ETFs]
Vanguard Real Estate ETF (VNQ)
— Assets under management: $34 billion
— Expense ratio: 0.12%, or $12 per year on every $10,000 invested
— Dividend yield: 4.0%
If you don’t mind going all in on a single sector, VNQ is worth a look. The leader among real estate investment trust, or REIT, ETFs, this fund encompasses an incredibly wide swath of the real estate sector. It’s not just that there are 160 holdings at present, providing diversification across a large number of firms, but also the fact that it spans all facets of the property business. Top holdings at present include telecom infrastructure play American Tower Corp. (AMT), warehouse operator Prologis Inc. (PLD) and data center operator Equinix Inc. (EQIX), in addition to more traditional office building or shopping mall operators. And with a yield more than twice that of the typical S&P 500 component, the focus on this sector can really pay off.
iShares International Select Dividend ETF (IDV)
— Assets under management: $4.2 billion
— Expense ratio: 0.51%, or $51 per year on every $10,000 invested
— Dividend yield: 6.6%
Multinational stocks that are located outside the U.S. may be familiar to many U.S. investors, but they don’t have a place in the typical ETFs. That’s a shame because international companies sometimes pay more generous dividends than domestic companies do, even if they only once or twice per year. IDV provides U.S. investors access to this strong income potential via a 100-stock portfolio featuring firms like Australian mega-miner BHP Group Ltd. (BHP), European carmaker Mercedes-Benz Group (OTC: MBGYY) and Dutch financial services giant ING Groep NV (ING), to name a few. These established players are similar to U.S. blue chips, even if they’re less familiar, and they offer a great way to access high-dividend investments that pay more than the typical S&P 500 component.
Global X SuperDividend ETF (SDIV)
— Assets under management: $760 million
— Expense ratio: 0.58%, or $58 per year on every $10,000 invested
— Dividend yield: 11.8%
Both real estate stocks and international picks appear in SDIV, which helps boost the yield of this ETF above and beyond all others on this list so far. As you can probably guess, however, this Global X fund prioritizes yield over widespread diversification and risk management. Roughly a third of the portfolio is in real estate, for instance, meaning volatility in that sector will affect the fund. Furthermore, emerging markets make up a substantial part of the portfolio, including 11% of total assets headquartered in China. If these factors don’t turn you off, SDIV is a good option considering its big yield and a lack of overlap with other more traditional dividend funds.
JPMorgan Equity Premium Income ETF (JEPI)
— Assets under management: $33.8 billion
— Expense ratio: 0.35%, or $35 per year on every $10,000 invested
— Dividend yield: 7.6%
If you’re willing to think beyond the typical large-cap names in pursuit of dividend ETFs, then you may want to look beyond traditional dividend-generating assets altogether. That’s what this unique high-yield ETF offers, with a portfolio of more than 100 stocks with options contracts layered on top. This strategy supercharges the income potential of those investments like insurance leader Progressive Corp. (PGR) by selling an instrument known as a covered-call option that guarantees you will sell your shares at fixed price to another investor down the road. This can cap the upside of shares, for instance, if you agree to sell at $50 and shares run all the way up to $60. But the other investor pays you for that option contract — whether it hits that target or not. And as you can see, those premiums can add up to a big-time yield from this ETF even if they aren’t as consistent as traditional dividend payments.
iShares Preferred & Income Securities ETF (PFF)
— Assets under management: $14.8 billion
— Expense ratio: 0.46%, or $46 per year on every $10,000 invested
— Dividend yield: 6.3%
One final way to maximize your yield is via dividends from preferred stock rather than common stock. This asset is a kind of hybrid between stocks and bonds. It offers not only the stability and income potential of conventional bond offerings of corporate debt, but also a bit more risk as it isn’t protected in the event of default in the same way stocks are excluded from bankruptcy proceedings. Typically, preferred stock is issued by large and capital-intensive enterprises to raise cash and grow, so PFF is skewed toward financials, with about three-quarters of its assets tied up in the sector. It’s also worth noting that preferred stock doesn’t move as much as common stock, so this fund will not deliver the same upside potential to shares that the typical dividend stock ETF will. That said, the big-time yield this fund provides could be a nice alternative to the usual income picks. And since it’s a different asset class, you can use it to easily diversify without this fund duplicating positions you already hold in the usual blue-chip stocks.
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7 Best Dividend ETFs to Buy Now originally appeared on usnews.com
Update 04/19/24: This story was previously published at an earlier date and has been updated with new information.
