There’s a lot to like about dividend stocks.
For one thing, dividend stocks and their payouts have driven long-term returns. Over time, dividends have played the single largest role in the overall gains in the stock market. Since 1930, dividends have accounted for nearly 42% of the total returns of the S&P 500. Without dividends, we would have significantly less in the way of total market returns.
At the same time, stock dividends carry lucrative tax advantages and offer the ability to beat inflation as companies raise their payouts. That’s something that the interest from bonds can’t do.
And let’s not forget that dividend payments can help cushion downturns in the stock market as well.
So everyone should have a hefty dose of dividends in their portfolios. And one of the easiest ways to get that fix is through an exchange-traded fund.
There are now numerous ETFs that specialize in paying dividends. By using a dividend ETF, investors gain all the benefits of dividends while adding plenty of diversification as well.
Here are five dividend ETFs that investors should consider today.
Dividend ETFs to Buy: Vanguard High Dividend Yield ETF (VYM)
Dividend Yield: 3.2%
Expenses: 0.09%, or $9 per $10,000 invested
For investors looking for a core option, the Vanguard High Dividend Yield ETF (VYM) could be one of the best dividend ETFs to pick.
The ETF’s index — the FTSE High Dividend Yield Index — tracks a portfolio of large-cap stocks that pay above-average dividends relative to the broad market. And while the name “high yield” conjures up images of risky stocks with eye-popping yields that are waiting to be cut, this simply isn’t the case at VYM.
Its portfolio of 480 different stocks is chocked full of steady-eddie blue chips that churn out secure dividends and cash flows. Top holdings for the ETF include Wells Fargo & Co. (WFC) and The Coca-Cola Co (KO).
That focus on dividends from top firms has helped VYM perform pretty well over the years.
For the last five years, ending March 31, VYM has managed to return 12.67% annually. That’s enough to turn $100,000 into more than $182,000 — and the main part of that return has been dividends.
Expenses for VYM run at a Vanguard-cheap 0.09%, or $9 per $10,000 invested.
Dividend ETFs to Buy: iShares Core Dividend Growth ETF (DGRO)
Dividend Yield: 2.5%
Expenses: 0.12%
A high headline yield isn’t everything. In fact, stocks with smaller yields that consistently grow their payouts actually take the cake when it comes to long-term returns. That’s because these rising dividend payouts can help keep the cold hand of inflation at bay.
Over the longer term, inflation is one of the main deterrents to wealth generation and retirement.
With that in mind, the iShares Core Dividend Growth ETF (DGRO) is a great dividend stocks pick.
DGRO tracks an index of U.S. stocks that have grown their payouts year in and year out. Stocks in the index are screened for sustainability of dividend growth, meaning, DGRO will kick out any firm that has shaky financials or poor cash flows in order to keep the dividend growth going.
The dividend ETF’s holdings read like a who’s who of American blue chips, including Exxon Mobil Corporation (XOM) and Pfizer Inc. (PFE).
DGRO’s current yield of 2.5% is designed to grow over time as more of these firms hand over more cash over the long haul. Again, the name of the game isn’t that yield — albeit, 2.5% is still pretty good. The game is increasing an investor’s yield on cost.
Expenses for DRGO are cheap at just 0.12%.
Dividend ETFs to Buy: Global X SuperDividend ETF (SDIV)
Dividend Yield: 7.9%
Expenses: 0.58%
But what happens if you are just looking for that headline yield? Dividend ETFs deliver again.
The Global X SuperDividend ETF (SDIV) is an odd mixture of various global high-yielding stocks, trusts, MLPs and other securities. However, in that diverse mixture, investors are treated to one of the highest-yielding dividend ETFs around. Currently, SDIV’s yield is around 7.9%.
In order to get that yield, SDIV will scour the globe for the 100 highest yielding securities. It’ll then equal-weight those firms selected to help balance out the risk associated with high-yielding stocks. SDIV will also apply certain dividend stability filters to help cushion the potential downside.
Currently, real estate investment trusts (REITs) — both equity and mortgage REITs — make up around 43% of the dividend ETF’s holdings. That high weighting could be a problem if the Federal Reserve keeps on raising interest rates.
Helping counterbalance that is the fund’s global nature. SDIV has the United States only making up around 39% of the ETF’s assets. There’s plenty of geographic, currency and interest-rate risk exposures in the fund.
SDIV has an added bonus of paying its dividend monthly. Expenses run 0.58%.
Dividend ETFs to Buy: SPDR S&P International Dividend ETF (DWX)
Dividend Yield: 5.9%
Expenses: 0.45%
When it comes to dividends, investors shouldn’t ignore stocks overseas. Just as in the U.S., dividends overseas have helped on the total return front … perhaps even more than in the U.S., as international firms tend to have more dividend-friendly policies.
A prime way to add a dash of international dividends is through the SPDR S&P International Dividend ETF (DWX).
DWX tracks the 100 highest dividend-yielding common stocks and ADRs in the developed world outside of the United States. Australia, the United Kingdom and Canada round out the top three country holdings.
And while not the dominate holdings, the fund does include some exposure to emerging markets. Investors shouldn’t fret this, as DWX’s emerging market holdings are some of the top and largest firms in their respective industries. These aren’t fly-by-night operations.
Top holdings include Crescent Point Energy Corporation (CPG) and Rio Tinto Plc (ADR) (RIO).
Overall, the fund is quite balanced in terms of international exposure. That wide range of firms helps DWX produce a hefty 5.9% dividend yield. That yield could grow further as foreign currencies fluctuate against the U.S. dollar. While the greenback has been surging lately, historically it hasn’t. If it reverts back to the mean, investors could be treated with higher dividends.
Expenses for DWX run at 0.45%.
Dividend ETFs to Buy: WisdomTree SmallCap Dividend ETF (DES)
Dividend Yield: 3.9%
Expenses: 0.38%
Investors often look towards small caps purely as growth elements. However, when you add a touch of dividends, they get even better.
But finding those small-caps with strong payouts can be a difficult task. Luckily, dividend ETFs can help you out.
The WisdomTree SmallCap Dividend ETF (DES) is a perfect fund to use in order to profit from this.
DES tracks a basket of small-cap dividends stocks here in the United States. While the ETF does choose those with the highest yields, it also adds a bunch of financial and fundamental screens in order to insure that those dividends are secure. By doing this, DES hopes to avoid any of the extra risks that come along with small-cap investing.
Top holdings for the ETF include utility Allete Inc (ALE) and natural gas processor Targa Resources Corp (TRGP).
The focus on dividends and small caps has been pretty fruitful for DES’s investors. The fund over the last five years has managed to produce a 10.7% annual return. For pure income seekers, DES is also great. The ETF currently yields 3.9% and pays that dividend monthly.
Expenses for the small-cap dividend ETF run at just 0.38%.
As of this writing, Aaron Levitt was long VHDYX, which is the mutual fund share class of VYM.
