Investors often turn to dividend-paying stocks and exchange-traded funds (ETFs) for reliable income and stability.
While income is a key component of a retirement portfolio, dividend equities, like every other investment, have pros and cons.
On the one hand, they can provide a buffer during volatile markets, making them a frequent choice for more risk-averse investors. On the other hand, their potential for long-term growth is often limited, compared with growth-focused stocks. That’s been clear in the past few years, as growth stocks like Nvidia Corp. (ticker: NVDA), Tesla Inc. (TSLA) and Super Micro Computer Inc. (SMCI) have raced to new highs.
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“After years of investing in the U.S. stock market, I’ve developed a love-hate relationship with dividend-paying stocks and ETFs,” says Louis Blyth Llanes, senior vice president and wealth advisor at Farther in Denver.
Reducing Risk
“This push-pull dynamic stems from recognizing their strengths and weaknesses,” Llanes says. “On the positive side, these stocks perform exceptionally well during periods of higher volatility because they cushion downside risk.”
That’s because dividend-paying stocks tend to have a lower duration in their risk-return profile, he says. “Lower duration means you’re receiving more of the company’s earnings sooner in the form of dividends, reducing the overall risk compared to growth-oriented stocks,” he says.
However, he adds, the downside of high-dividend-paying stocks and ETFs is their typically slower growth rate. Over time, their total return may lag behind faster-growing stocks. A company’s growth rate is tied to how much of its earnings it reinvests in future projects.
However, companies that consistently increase their dividends over time, sometimes over several decades, are in a unique group of those with strong financial health and a long-standing commitment to shareholder value. These dividend growers can strike a balance between income and growth potential, making them an attractive option for long-term investors.
Still, because high-dividend-paying companies return more capital to shareholders, they have less money to reinvest. That can impede growth, especially compared to companies reinvesting more profits into expansion and innovation.
Here is a look at the pros and cons of some popular dividend-focused ETFs.
ETF | Forward Dividend Yield* |
ProShares S&P 500 Dividend Aristocrats ETF (NOBL) | 2.1% |
iShares Select Dividend ETF (DVY) | 3.7% |
Invesco Dividend Achievers ETF (PFM) | 1.6% |
SPDR S&P Dividend ETF (SDY) | 2.6% |
Vanguard Dividend Appreciation ETF (VIG) | 1.7% |
*As of Jan. 29 close.
ProShares S&P 500 Dividend Aristocrats ETF (NOBL)
This ETF is composed of the S&P 500 “Dividend Aristocrats“: High-quality companies with a record of increasing their dividends for at least 25 years. Most companies in the fund have boosted payouts for 40 years or more.
It currently holds 66 stocks and has low concentration risk, as no holdings are weighted more than 1.78%. It has an expense ratio of 0.35%, higher than some other dividend-focused ETFs. That means it has to scale a higher performance hurdle to deliver the equivalent return of a cheaper fund.
Like other dividend ETFs, NOBL outperformed the broader S&P 500 in 2022, but it underperforms when growth stocks are leading the market higher. NOBL’s yield is 2.1%.
“It may fit as a portion of a portfolio design focusing on creating consistent dividend income,” says Emmanuel Eliason, president and CEO of Eliason Wealth Management in Centennial, Colorado.
iShares Select Dividend ETF (DVY)
The DVY ETF offers market-cap-weighted exposure to U.S. companies with a consistent history of paying dividends. It has 90 holdings, with the top components being Altria Group Inc. (MO), AT&T Inc. (T) and International Paper Co. (IP). Its 30-day SEC yield is 3.7%.
Like NOBL, the expense ratio is fairly high, at 0.38%. It’s linked to the Dow Jones U.S. Select Dividend Index. “The fund strategy generally seeks to invest most of its assets in high-dividend-paying U.S. equities,” Eliason says.
The top 10 holdings constitute 20.3% of the ETF’s assets. Turnover is 17%, higher than you’ll find in a broader index like the S&P 500 or the Nasdaq-100.
Invesco Dividend Achievers ETF (PFM)
This ETF measures performance of the Nasdaq U.S. Broad Dividend Achievers Index, which identifies a diverse group of companies that increased their annual dividend for 10 or more consecutive years.
It’s a relatively small ETF, with only $717.8 million under management. However, it’s a broad index, with 422 holdings.
The ETF, as well as its underlying index, are reconstituted annually in March. That’s the process of updating the components. Rebalancing happens quarterly in March, June, September and December.
“The Invesco Dividend Achievers ETF is unique amongst the dividend EFTs in that it really pushes for growth more than many of its competitors,” says Benjamin Simerly, founder and wealth advisor at Lakehouse Family Wealth in Cleveland.
The growth emphasis is evident in the top three holdings: Microsoft Corp. (MSFT), Apple Inc. (AAPL) and Broadcom Inc. (AVGO).
Growth has helped this ETF deliver healthy returns relative to other dividend-focused ETFs. However, it’s lagged the broader market.
“PFM has underperformed the S&P 500 for the past two years,” says Jon Wolfenbarger, founder and CEO of BullAndBearProfits.com in New York. Wolfenbarger also notes that PFM’s yield of 1.6% is lower than some other dividend ETFs. Its dividend growth rate of 4.1% is also lower than some others.
However, the fund’s total return in 2024 was 17% by net asset value, outpacing the average return for its category by 2.7 percentage points, according to Morningstar.
[READ: 7 of the Best Growth Funds to Buy and Hold]
SPDR S&P Dividend ETF (SDY)
The SPDR S&P Dividend ETF is pegged to the S&P High Yield Dividend Aristocrats Index of companies that have consistently increased their payouts for at least 20 consecutive years. It differs from other dividend ETFs in that it’s yield-weighted, rather than market-cap-weighted.
The index includes stocks with both growth and income characteristics, rather than purely yield. Its turnover is high, at 55%; and it has an expense ratio of 0.35%.
Its yield is 2.6%. Performance lagged other dividend aristocrat ETFs in 2023 and 2024, although it was down only 0.52% in 2022 while the broader S&P 500 declined 18% and other dividend ETFs dropped 20% or more.
This ETF has a twist: Its underlying index measures performance of the highest-dividend-yielding stocks from the S&P Composite 1500 Index. That means it’s drawing from a much wider universe of stocks than the large-cap S&P 500. For that reason, it has a mid-cap tilt, giving it more growth potential than a large-cap fund.
“Investors seeking to allocate to a dividend-paying mid-cap value portfolio may find it helpful to consider,” Eliason says.
Vanguard Dividend Appreciation ETF (VIG)
VIG tracks the performance of the S&P U.S. Dividend Growers Index, which is composed of large-cap stocks with a history of growing dividends year over year.
Consistent with other Vanguard ETFs, VIG has a low expense ratio of 0.06% and its yield is 1.7%.
VIG is among the largest dividend appreciation ETFs, with $88.3 billion under management. It has 337 holdings with a median market capitalization of $208 billion.
Top components are Microsoft, Apple and Broadcom. Those growth stocks have boosted the fund’s performance in recent years, although its yield is lower than those of other dividend ETFs.
“So the total return may be coming from more capital appreciation rather than dividend income,” says Bill McNeer, partner and senior wealth advisor at Capasso Planning Partners in Winston Salem, North Carolina.
McNeer also points out that VIG has a beta of 0.84, meaning it’s 16% less risky than the S&P 500. However, it may offer slightly lower growth potential, especially in bull markets driven by high-growth companies.
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Update 01/30/25: This story was previously published at an earlier date and has been updated with new information.