These Are the Top 7 Dividend ETFs

Best Dividend ETFs

Dividend investing remains incredibly popular, yet the challenge lies in finding the right approach. How does one secure dividend income without taking on unnecessary risks?

Many investors have turned away from fixed income strategies due to the impact of rising interest rates, causing bond prices to plummet. Consequently, dividend stocks have emerged as a favored alternative.

By investing in equities, there’s the potential to mitigate volatility by holding onto stable, dividend-paying companies.

Whether you opt to receive cash or reinvest dividends, you’re essentially investing in companies that exhibit confidence in their future prospects—after all, profitable companies tend to pay dividends.

Dividend ETFs streamline the process of owning a diversified portfolio comprising excellent dividend-paying stocks.

We have curated a list highlighting the finest dividend ETFs available. We’ve meticulously selected a mix of low-fee, passive funds along with actively managed funds striving to outperform the market.

Our list includes the distribution dividend, representing the dividend yield over the past 12 months.

1️⃣ Vanguard International High Dividend Yield ETF (VYMI)

• Expense Ratio: 0.22%
• Dividend Yield: 4.39%
• Avg. Ann. Return Since Inception (February 2016): 7.39%

Why VYMI?

Amid recent outperformance of international stock funds after trailing U.S. stocks for years, the Vanguard International High Dividend Yield ETF stands out as a worthy consideration.

It blends robust returns this year with a substantial dividend yield and Vanguard’s hallmark low expense ratio.

VYMI offers convenient access to foreign stocks boasting above-average dividend yields. Holding approximately 1,300 stocks, it holds more companies compared to others on our list, ensuring robust diversification.

Around 80% of VYMI’s holdings come from developed markets, with about 20% stemming from emerging market companies.

Europe hosts roughly 40% of holdings, the Pacific region accounts for roughly 25%, and approximately 8% are from North America.

2️⃣ Invesco S&P 500 High Dividend Low Volatility ETF (SPHD)

• Expense Ratio: 0.30%
• Dividend Yield: 4.55%
• 10-Year Avg. Ann. Return: 8.13%

Why SPHD?

The Invesco S&P 500 High Dividend Low Volatility ETF constructs its portfolio from S&P 500 index stocks.

The fund selects 50 securities from this benchmark index based on high dividend yields and low volatility, primarily focusing on companies categorized by Morningstar as value-oriented stocks, mostly large- and mid-cap stocks.

The fund undergoes evaluation and reconstitution in January and July.

Given the sector’s generous dividends, real estate constitutes SPHD’s largest sector. Utilities, communications, and consumer staples also hold substantial weight. Industrials, energy, and basic materials have smaller roles.

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3️⃣ WisdomTree U.S. SmallCap Dividend Fund (DES)

• Expense Ratio: 0.38%
• Dividend Yield: 2.92%
• 10-Year Avg. Ann. Return: 6.00%

Why DES?

The WisdomTree U.S. SmallCap Dividend Fund presents a balanced mix of small-cap, value-oriented, and core U.S. stocks that pay dividends. Its robust dividend yield suggests a promising approach.

Historically, small-cap value stocks have outperformed the overall U.S. stock market over extended periods, potentially positioning DES for long-term outperformance. Additionally, the fund’s monthly dividend payouts distinguish it from most ETFs that distribute dividends quarterly.

Financial stocks dominate DES’s largest sector, followed by industrials, consumer discretionary, and real estate sectors. Investors seeking frequent cash flow coupled with growth potential might find this fund appealing.

4️⃣ FCF International Quality ETF (TTAI)

• Expense Ratio: 0.59%
• Dividend Yield: 10.38%
• Avg. Ann. Return Since Inception (June 2017): 3.60%

Why TTAI?

FCF International Quality ETF strives to outperform its benchmark, the MSCI ACWI Ex USA NR Index. This fund invests in foreign stocks deemed high quality, possessing robust free cash flow and sustainable profitability.

To determine “high quality,” the managers weigh environmental, social, and governance (ESG) issues alongside traditional fundamentals.

TTAI’s 154 holdings comprise roughly equal portions of growth and value stocks. Approximately three-quarters of the fund is invested across six sectors: industrials, consumer discretionary, technology, financial services, energy, and healthcare stocks.

For investors seeking income from an actively managed international fund focusing on quality stocks, TTAI presents an intriguing option.

5️⃣ Invesco High Yield Equity Dividend Achievers ETF (PEY)

• Expense Ratio: 0.52%
• Dividend Yield: 4.82%
• 10-Year Avg. Ann. Return: 9.73%

Why PEY?

The Invesco High Yield Equity Dividend Achievers ETF encompasses the 50 U.S. dividend stocks boasting the highest yields and a consistent history of increasing dividend payments.

Tracking the NASDAQ US Broad Dividend Achievers Index, PEY rebalances quarterly and distributes dividends monthly.

Approximately three-quarters of the fund comprises value stocks, while the rest are core equities, covering a range of capitalization sizes. Utilities account for around 25% of holdings, with financial services being the next significant sector, constituting roughly 20%.

Over the past three years, PEY has displayed relatively low volatility, as indicated by Morningstar’s upside- and downside-capture ratios. This fund could be a suitable choice for investors seeking frequent cash flow from an ETF that has provided reasonable total returns.

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6️⃣ Schwab U.S. Dividend Equity ETF (SCHD)

• Expense Ratio: 0.06%
• Dividend Yield: 3.58%
• 10-Year Avg. Ann. Return: 10.68%

Why SCHC?

The Schwab U.S. Dividend Equity ETF boasts the lowest expense ratio among our selections, a key factor for this passive fund. While passive funds often outperform actively managed ones, active management still excels in categories like corporate bonds and real estate.

SCHD tracks the Dow Jones U.S. Dividend 100 Index, focusing on stocks with sustainable and “quality” dividends. This index and SCHD aim for stocks showing potential to consistently share profits in the form of dividends with shareholders.

Similar to most of our choices, SCHD leans toward value and core stocks rather than growth stocks. Roughly 90% of its assets are spread across seven sectors: financial services, energy, consumer cyclicals, industrials, healthcare, consumer staples, and technology.

7️⃣ Fidelity High Dividend ETF (FDVV)

• Expense Ratio: 0.29%
• Dividend Yield: 3.32%
• Avg. Ann. Return Since Inception (September 2016): 9.8%

Why FDVV?

The Fidelity High Dividend ETF seeks to mirror the performance of large- and mid-cap dividend stocks anticipated to continue paying and increasing dividends. FDVV’s mandate permits lending out securities to generate income.

Around 90% of FDVV’s holdings are U.S. stocks, with the remainder stemming from Japan, the U.K., Italy, Belgium, the Netherlands, and Denmark. Top-ten holdings constitute approximately 30% of the fund, with technology and financial services being the largest sectors.

FDVV’s non-U.S. allocation adds diversity to the portfolio and likely contributes to its yield. It screens out the top 5% of stocks in its index with the highest payout ratios to mitigate overly risky holdings.

The management also considers payout ratio and dividend growth as indicators of financial health during stock selection.

These ETFs each offer unique characteristics catering to various investor preferences and goals.

Dividend ETFs FAQ

How to Find the Best Dividend ETFs?

In crafting this selection, we initiated with a pool comprising high dividend-paying U.S. and international equity ETFs. We excluded funds that primarily invest in bonds, real estate investment trusts, and other specific high-yielding asset classes.

Following this, ETFs with expense ratios exceeding 0.67% were omitted. Generally, lower fees tend to amplify returns. Additionally, we filtered out funds yielding below 2.67% in dividends.

Subsequently, newer funds launched within the past three years were removed. These steps refined our list to approximately 500 funds.

Our subsequent move involved eliminating ETFs rated below three stars by Morningstar. The research firm’s star ratings gauge a fund’s risk-adjusted return concerning other open-end funds within the same category.

To cater to a broad spectrum of investors, we excluded niche sector funds and opted solely for broadly diversified U.S. and international high dividend equity funds. This process narrowed down the list to fourteen funds.

The seven highlighted equity dividend ETFs encompass a diverse array of fund families and strategies. Notably, one of the selected ETFs is actively managed.

While many dividend funds lean towards value, our selection also incorporates funds with growth and momentum characteristics. You can confidently consider any of these dividend ETFs from our list to complement a diversified investment portfolio.

What’s a Dividend ETF?

A Dividend ETF, or exchange-traded fund, is a financial product that comprises stocks from companies with a consistent track record of paying dividends to their shareholders.

When an investor holds a dividend ETF, the fund managers ensure that the selected holdings consistently provide favorable dividends.

Much like any other exchange-traded fund, the managers of a dividend ETF curate a portfolio of stocks that mirror the composition of a dividend index. This portfolio offers investors an affordable means of generating income through investments.

For many, dividend ETFs present a more convenient avenue for income investing compared to individually owning and managing a collection of dividend-paying stocks. Unlike the predictable coupon payments associated with bonds, dividend payments aren’t guaranteed.

This factor significantly increases the effort required for individual investors to maintain a portfolio focused on dividend stocks.

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How to Choose a Dividend ETF?

Choosing a Dividend ETF involves several key considerations to align with your investment objectives and preferences. Here’s a breakdown of factors to keep in mind:

1. Dividend Yield

Definition: It’s the percentage of the purchase price paid in dividends over the past 12 months. For instance, if a $100 ETF pays $10 in dividends, its dividend yield is 10%.

Consideration: Look for a yield that matches your income needs but beware of excessively high yields, as they might signal higher volatility or unsustainable payouts.

2. Dividend Growth

Importance: Assess the historical growth rate of dividends. Consistent or increasing dividends suggest stability and a company’s confidence in its future prospects.

Preference for Dividend Aristocrats: Consider ETFs comprising companies with extended histories of dividend increases, such as those in the S&P 500. These firms often provide more reliable dividend growth.

3. Dividend Quality

Risk Assessment: Check the quality and creditworthiness of the stocks held by the ETF. Riskier companies with lower credit ratings might impact the fund’s value and overall returns negatively.

Avoidance of Riskier Companies: As a general rule, steer clear of funds that use riskier companies to inflate yields to protect your total return.

4. Balance of Yield and Volatility

High-Yielding ETFs: Keep in mind that the highest-yielding dividend ETFs might display more erratic yields over time and might struggle to maintain those yields consistently, especially during market downturns.

Trade-Off between Yield and Growth: Traditional dividend ETFs might feature slower-growing companies compared to the broader market. Consider the trade-off between stable income and potential appreciation through rising stock prices.

5. Consider Overall Investment Goals

Income vs. Growth: Assess whether your primary goal is income generation or capital appreciation. Some investors might opt for stocks poised for growth in value and sell shares periodically for income needs.

Understanding these factors and aligning them with your investment goals will help you select a Dividend ETF that suits your risk tolerance, income needs, and growth expectations effectively.

Types of Dividend ETFs?

Diversified Dividend ETFs

These ETFs feature companies offering higher-than-average dividend payments. However, greater dividends often correlate with higher risk and potential price volatility.

International Dividend ETFs

Similar to domestic high-dividend ETFs, these invest in international companies. They offer diversification beyond the U.S. market but may face higher taxation rates on dividends. Consulting a tax professional is recommended for heavy reliance on these ETFs.

Real Estate Dividend ETFs

Focused on Real Estate Investment Trusts (REITs) that own or finance income-generating real estate. REITs are obliged by law to distribute a large portion of their income to shareholders, making them attractive for those seeking substantial dividend payouts.

Dividend Aristocrat ETFs

Comprise the crème de la crème of dividend-paying stocks known for consistent and reliable dividend income, ideal for those seeking stability in dividend payments.

Dividends ETF Taxes?

Tax Treatment

Dividend ETFs follow taxation rules akin to their underlying securities. Dividends, even if reinvested, are counted as taxable income. Investors typically receive tax forms like 1099-DIV that differentiate between qualified and ordinary dividends.

Taxation Rates

Qualified dividends, often from U.S.-based companies, are taxed at lower rates (similar to long-term capital gains). Ordinary dividends, more common in international companies, are taxed at regular income tax rates.

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Why Invest in Dividend ETFs?

For Conservative or Income-Seeking Investors: Dividend ETFs appeal to those wanting cash flow and conservative strategies.

Capital Appreciation Potential: These ETFs offer potential for both income and capital appreciation by investing in dividend-paying companies benefiting from earnings growth and dividends.

Diversification without Stock Picking: Ideal for those desiring diversified exposure to dividend stocks without the need for individual stock research.

Risk Considerations: While attractive for income, dividend ETFs aren’t risk-free. They can be affected by market volatility, and companies within can reduce or halt dividend payments, impacting ETF performance.

Understanding the nuances and risks associated with dividend ETFs is crucial before considering them as part of your investment strategy.

Benefits of Dividend ETFs?

Diversification

Dividend ETFs hold numerous stocks and securities, offering easy diversification and mitigating the risk associated with individual assets.

Low Fees

ETFs generally have lower expense ratios compared to mutual funds or other investment vehicles, potentially saving investors money over time.

Liquidity

Being exchange-traded, dividend ETFs are easily bought and sold like individual stocks. Their high demand usually ensures high liquidity.

Transparency

Managers of dividend ETFs are obliged to disclose their holdings daily, providing clear insight into the fund’s composition and strategy.

Tax Efficiency

ETFs are often more tax-efficient than mutual funds as they don’t need to sell securities to meet redemptions, thereby potentially avoiding triggering capital gains taxes.

These advantages position dividend ETFs as attractive options, especially for income-focused investors. However, conducting thorough research and understanding the associated risks is crucial before investing in any security.

What’s a dividend?

Dividends represent how companies distribute earnings to shareholders, typically in cash or stock. Each share of stock you own may entitle you to a specific dividend payout.

Public companies aren’t obligated to pay dividends. Both private and public companies can decide the frequency of dividend payments, choosing between monthly, quarterly, or annual schedules.

How are dividends taxed?

There are two types of dividends concerning taxation: qualified dividends and ordinary dividends. Qualified dividends adhere to capital gains tax rules, while ordinary dividends follow regular income tax rules.

Qualified dividends usually stem from U.S. or foreign companies trading on major U.S. stock exchanges or companies in countries with a U.S. tax treaty.

On the other hand, ordinary dividends might come from foreign companies not meeting qualified dividend criteria or from various sources like savings or checking accounts, REITs, employee stock benefits, or tax-exempt entities.

What’s a dividend yield?

Dividend yield gauges the relative value of a company’s dividend payments. It’s calculated by dividing a stock’s annual dividend amount by its current share price. The dividend yield is always expressed as a percentage.

Comparing dividend yields helps assess the value of dividends offered by different companies. For instance, a stock with higher quarterly dividends might seem appealing, but if the stock price is also high, it could lower the overall dividend yield.

How do you calculate dividend yield?

Dividend yield is determined by dividing the stock’s annual dividend amount by its current share price. For instance, if a stock trades at $10 per share and pays quarterly dividends totaling 40 cents for the year, the dividend yield would be 4%.

What does ex-dividend mean?

The ex-dividend date signifies the deadline by which you must own a dividend stock to qualify for receiving the payment. It’s crucial for investors expecting dividends from a stock.

Usually set one business day before the company checks its stockholder roster for dividend eligibility, the ex-dividend date matters. Purchasing shares on or after this date disqualifies you from receiving the upcoming dividend payment.

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