When you're investing for the long run, there's nothing like a sizable allocation to dividend-paying stocks to help you get some sleep at night. And if cold, hard cash is like a warm, fuzzy blanket, dividend ETFs (exchange-traded funds) are like a closet full of quilts.
Admittedly, it's hard to care about gradually building wealth with dividend payments when there are so many flashier things going on. Be real: How many CNBC and Bloomberg TV spots have you watched about the explosive gains of AI stocks? OK, now how many spots have you watched about slow trickles of cash?
That's fine. Because what dividend stocks lack in curb appeal, they make up for in substance. From Hartford Funds:
"Dividends have played a significant role in the returns investors have received during the past 50 years. Going back to 1960, 69% of the total return of the S&P 500 Index can be attributed to reinvested dividends and the power of compounding."
Clearly, you don't want to sleep on dividends … but what's the best way to stash them in your portfolio? You could try to pick and choose individual stocks that pay shareholders, but like with any single-stock investments, you're taking on a bit of risk — not just of the company faltering and shares heading lower, but that, sometime in the future, it cuts or even eliminates its dividend.
Or, you could spread out that risk across dozens, hundreds, even thousands of stocks via dividend ETFs.
So read on as we discuss seven of the best dividend ETFs for a diversified portfolio. To find the best ETFs to buy, we've narrowed our search down to seven funds with low costs and varying strategies. We've also selected ETFs that enjoy Morningstar Gold or Silver Medalist ratings — Morningstar's forward-looking ratings system that analyzes a fund's ability to outperform its category in the future.
- Type: Large-cap blend
- Assets under management: $59.8 billion
- Dividend yield: 3.4%
- Expenses: 0.06%, or $6 annually on a $10,000 investment
Let's start with the Schwab US Dividend Equity ETF (SCHD), a straightforward, well-rounded solution ideal for buy-and-hold investors looking for a low-cost ETF.
This index fund follows the Dow Jones U.S. Dividend 100 Index, which tracks 100 high-yielding stocks from the Dow Jones U.S. Broad Market Index that have paid dividends for at least 10 consecutive years. It has quality filters as well, favoring cash flow to total debt, return on equity, five-year dividend growth and dividend yield.
"The index's dividend screen and fundamental considerations breed exposure to the quality factor, which has historically been tied to market-beating returns," says Morningstar analyst Ryan Jackson, in explaining the fund's upgrade to a gold Morningstar Medalist rating. "In profitability measures like return on invested capital, the fund comfortably exceeds the Russell 1000 Value Index."
The resultant portfolio is a roughly 100-member group of large-cap dividend stocks. Indeed, the weighted average market capitalization of its holding set is about $130.9 billion — well into mega-cap status.
While it's diversified by sector, some sectors enjoy greater weight than others. Five boast double-digit exposure at the moment: financial services (18.4%), healthcare (16.3%), consumer defensive (14.3%), industrials (13.3%) and consumer energy (12.5%). Importantly, SCHD intentionally excludes real estate investment trusts (REITs) and master limited partnerships (MLPs).
Top holdings include the likes of Lockheed Martin (LMT), AbbVie (ABBV) and Home Depot (HD) that help deliver a supple yield of 3.4%. And that's almost twice the S&P 500's yield at present.
Investors can purchase all of the above at one of the lowest expense ratios among dividend ETFs. SCHD's 0.06% expense ratio translates into just $6 per year if you have $10,000 invested in the fund.
Learn more about SCHD at the Schwab provider site.
- Type: Mid-cap value
- Assets under management: $21.2 billion
- Dividend yield: 2.4%
- Expenses: 0.35%
Let's turn our attention toward dividend growth and look at the SPDR S&P Dividend ETF (SDY).
SDY tracks the S&P High Yield Dividend Aristocrats Index. As you might imagine, this is similar to the S&P 500 Dividend Aristocrats but with a few tweaks. The S&P 500 Dividend Aristocrats are S&P 500 stocks with 25 or more consecutive years of payout hikes. The S&P High Yield Dividend Aristocrats are pulled from the larger S&P Composite 1500, which includes large-, mid-, and small-cap stocks with 20 years of consecutives hikes and that are weighted by yield.
While you'd imagine dividend growth stocks would offer high yield, that's often not the case. In fact, many such funds offer yields comparable to or even less than the market. But SDY's dual focus offers both above-average yield as well as dividend growth, which itself is often a symptom of healthy, growing businesses.
"SPDR S&P Dividend ETF invests only in the market's most disciplined dividend stocks, breeding a high-quality portfolio that safely pursues yield," says Jackson, who gives SDY a silver Morningstar Medalist rating. "It should continue to offer a more attractive risk/reward profile than the Russell 1000 Value Index."
SDY is somewhat lopsided from a sector perspective. Consumer staples make up 18.7% of the portfolio, industrial stocks account for 18.4%, utility stocks garner 16.3% of assets, and financials make up 10.9%. Energy and real estate, meanwhile, account for 4.8% and 3.2% of the portfolio, respectively.
Top holdings include the likes of Realty Income (O), Kenvue (KVUE) and Xcel Energy (XEL).
Learn more about SDY at the SPDR provider site.
- Type: Large value
- Assets under management: $70 billion
- Dividend yield: 2.8%
- Expenses: 0.06%
Another dirt-cheap dividend ETF focused on high yield is (unsurprisingly) offered up by Vanguard.
The Vanguard High Dividend Yield ETF (VYM) tracks the FTSE High Dividend Yield Index, which is made up of above average-yielding stocks and, like SCHD, excludes REITs.
VYM offers a much larger selection of stocks than the FTSE High Dividend Yield Index. Its portfolio is made up of roughly 550 dividend payers with a massive median market cap of $131.4 billion. Financial stocks currently are tops at 21.3% of assets, though consumer defensive (12.7%), technology (12.3%), healthcare (12.3%), industrials (12.2%) and energy (10.2%) all enjoy double-digit weights as well. Top holdings are a who's who of dividend blue chip stocks: Exxon Mobil (XOM). Johnson & Johnson (JNJ). Procter & Gamble (PG).
The Vanguard High Dividend Yield ETF, which earns a gold Morningstar Medalist rating, might be worthy of more attention if the U.S. enters a recession. Shaky markets tend to send investors into dividend stocks, which can provide income when stock returns aren't there.
Learn more about VYM at the Vanguard provider site.
- Type: Large blend
- Assets under management: $14.2 billion
- Dividend yield: 1.5%
- Expenses: 0.28%
The WisdomTree U.S. Quality Dividend Growth Fund (DGRW) simultaneously tells you exactly what it invests in and is unintentionally misleading.
Whereas most "dividend growth" funds are interested in the growth of dividends, the WisdomTree U.S. Quality Dividend Growth Fund is interested in dividends — pause — and growth. As in, good old-fashioned earnings growth.
Got it?
Specifically, DGRW starts with a screening universe that includes any companies with a market cap of at least $2 billion within the WisdomTree U.S. Dividend Index. It then chooses the 300 stocks with the best combined rank of growth and quality factors. Growth is determined by long-term earnings growth estimates, while quality is based on three-year averages for return on equity (RoE) and return on assets (RoA).
DGRW, then, is a predominantly large-cap portfolio. It's also not terribly balanced. For one, tech is a full 29.9% of assets, followed by double-digit exposure in healthcare (17%), financials (11.6%), and consumer defensive (10.8%) … but five sectors have weights of 4% or less. Also, the top 10 holdings account for more than 36% the portfolio's weight, and the fund is pretty thick in Microsoft (MSFT) at 6.9% and Apple (AAPL) at 5.2%.
The aim with this fund isn't balance, but the stability imparted by dividends and the upside potential provided by above-average growth. So far, so good. DGRW is arguably one of the top funds you can buy right now, sporting both a Gold Medalist rating and five Morningstar stars.
Learn more about DGRW at the WisdomTree provider site.
- Type: Large value
- Assets under management: $397.9 million
- Dividend yield: 1.8%
- Expenses: 0.37%
Generally speaking, most fund managers would tell you they're trying to invest in high-quality stocks. But certain funds take this a step further, specifically targeting the "quality factor."
With factor investing, an investor targets certain attributes that they expect to produce higher returns. Low volatility is a factor, for instance, as are value and momentum. Quality is another such factor, and it typically revolves around choosing stocks with strong balance sheets, stable earnings and other signs of operational excellence.
Enter the FlexShares Quality Dividend Defensive ETF (QDEF).
QDEF tracks the Northern Trust Quality Defensive Index, which aims to create a portfolio that's both high in quality and low on volatility. The index evaluates all stocks within the Northern Trust 1250 index of large- and mid-cap stocks, then selects dividend payers that score well in management efficiency (e.g., corporate finance activities and corporate governance), profitability and cash flow generation.
Currently, this FlexShares ETF holds 136 dividend stocks that are primarily large in size. However, while it's considered a "large value" fund, just 33.4% of QDEF's portfolio is considered value in nature — the largest chunk, 41.2%, is classified as "core," while the remaining 25.4% is made up of growth stocks.
It's also somewhat imbalanced from a sector perspective. Tech stocks make up more than a quarter of assets, followed by only one other double-digit holding in healthcare. Five sectors are weighted at roughly 6% or less.
Top holdings for this Gold Medalist fund are a mix of stocks like Apple and Microsoft that you might not expect to garner top billing in many dividend ETFs, as well as classics such as Coca-Cola (KO) and Home Depot (HD).
Learn more about QDEF at the FlexShares provider site.
- Type: Foreign large growth
- Assets under management: $7.4 billion
- Dividend yield: 1.7%
- Expenses: 0.15%
The Vanguard International Dividend Appreciation ETF (VIGI) has the same thrust as other dividend growth ETFs — it simply applies its strategy to international stocks.
VIGI tracks the S&P Global Ex-U.S. Dividend Growers Index, a free-float adjusted market cap-weighted index made up of both large- and mid-cap stocks based in developed and emerging markets alike. The index selects companies that have improved their dividends for at least seven consecutive years. It then removes the highest-yielding stocks, a filter meant to improve portfolio quality and eliminate potential dividend cutters in the future. Lastly, stocks are capped at 4% weights at each year's rebalancing to avoid dedicating too many assets to any one company.
Currently, VIGI's portfolio holds roughly 335 stocks, and it tilts heavily toward large-caps, with roughly 85% of assets dedicated to bigger companies. While VIGI can hold emerging market stocks, they currently only command a 9.6% weight. Instead, the ETF favors developed Europe (47.9%), Pacific (30%) and North America (12.5%). Top country allocations at present include Japan (26.1%), Switzerland (17.5%), Canada (12.5%) and the U.K. (8.5%).
While VIGI focuses on dividend growers rather than high yielders, it's still chock-full of international blue chips such as Novartis (NVS), Novo Nordisk (NVO) and Nestle (NSRGY).
"Vanguard International Dividend Appreciation effectively captures high-quality firms with consistent dividend growth that should offer attractive long-term performance, meriting a Morningstar Medalist rating upgrade to Gold from Silver," says Morningstar director Bryan Armour. That makes VIGI one of the best dividend ETFs you can buy and one of the top offerings from Vanguard, period.
Learn more about VIGI at the Vanguard provider site.
- Type: Large value
- Assets under management: $2.9 billion
- Dividend yield: 5.1%
- Expenses: 0.63%
Typically, investors look to emerging markets for growth, but the WisdomTree Emerging Markets High Dividend Fund (DEM) taps EMs for high yield.
Really, really high yield.
DEM tracks the WisdomTree Emerging Markets High Dividend Index, a fundamentally weighted index that pulls its selections from the WisdomTree Emerging Markets Dividend Index. Specifically, it takes the highest 30% ranked by dividend yield and then weights them by annual cash dividends paid.
This is a wide portfolio of 473 emerging market stocks, primarily large-cap (67.7%) in nature, though it has plenty of mid-cap stocks (22.1%) and a decent store in small caps (10.2%). The fund isn't very top-heavy, either. Brazilian oil giant MediaTek, Inc. (2454) is the biggest holding at a little under 6%, and the top 10 holdings only account for 31% of assets.
DEM is, however, geographically lopsided. Taiwanese stocks make up almost a quarter of assets, followed by China at 22.1% and Brazil at 12.5%. Most of the other countries enjoy only token representation.
While WisdomTree's ETF is a whopper of a high-yield pick, the dividends aren't exactly as consistent as what you'll find here in the U.S. Some of its massive yielders — names like PBR and Vale (VALE) — have exceedingly variable dividends.
Even then, this Gold-rated fund routinely yields somewhere in the 5%–7% range, which puts it well ahead of virtually all stock funds, domestic and international alike.
Learn more about DEM at the WisdomTree provider site.
