When it comes to showcasing financial stability to shareholders, public companies often turn to cash dividend payments as a reliable method. By sharing a portion of their profits with investors, established companies reward them with cash dividends, providing a consistent source of passive income.
For those interested in dividend investments, exchange-traded funds (ETFs) can offer an efficient and convenient way to own dividend-paying companies. A dividend ETF is a fund that specifically focuses on investing in companies that pay dividends, with fund managers selecting these companies based on various criteria such as size, industry, geographic region, and dividend history.
ETFs provide instant diversification at a low cost, making them appealing to novice investors who may not have the expertise to pick individual stocks. Additionally, choosing a dividend investment style within an ETF ensures that every holding in the fund aligns with the selected profile, helping investors manage risk and potential returns.
Dividend ETFs: What to know before investing in one
Below are some of the top dividend ETFs currently available in the market, along with their yield and key holdings.
Top dividend ETFs
Here are some of the most popular dividend ETFs on the market as of July 19, 2024:
Vanguard Dividend Appreciation ETF (VIG)
VIG tracks the performance of the NASDAQ U.S. Dividend Achievers Select Index, focusing on companies with a history of consistently increasing dividend payments for at least ten years.
- Fund’s dividend yield: 1.8 percent
- Top holdings: Microsoft (MSFT), Apple (AAPL), Broadcom (AVGO)
- Expense ratio: 0.06 percent
- Assets under management: ~$81.0 billion
Vanguard High Dividend Yield ETF (VYM)
VYM tracks the FTSE High Dividend Yield Index, focusing on high-yield dividend-paying U.S. companies (excluding REITs).
- Fund’s dividend yield: 3.0 percent
- Top holdings: Exxon Mobil (XOM), JPMorgan Chase (JPM), Johnson & Johnson (JNJ), Broadcom (AVGO)
- Expense ratio: 0.06 percent
- Assets under management: ~$55.7 billion
Schwab US Dividend Equity ETF (SCHD)
SCHD aims to track the Dow Jones U.S. Dividend 100 Index, which includes companies known for strong financial performance and sustainable dividends.
- Fund’s dividend yield: 3.6 percent
- Top holdings: The Home Depot (HD), United Parcel Service (UPS), Chevron (CVX), Texas Instruments (TXN)
- Expense ratio: 0.06 percent
- Assets under management: ~$57.4 billion
SPDR S&P Dividend ETF (SDY)
SDY tracks the S&P High Yield Dividend Aristocrats Index, focusing on companies with a history of increasing dividend payments for at least 20 consecutive years.
- Fund’s dividend yield: 2.6 percent
- Top holdings: Realty Income (O), Chevron (CVX), Southern Co (SO)
- Expense ratio: 0.35 percent
- Assets under management: ~$20.3 billion
iShares Select Dividend ETF (DVY)
DVY tracks the Dow Jones Select Dividend Index, focusing on high-dividend yield U.S. companies.
- Fund’s dividend yield: 3.8 percent
- Top holdings: Verizon Communications (VZ), Altria Group (MO), Pfizer (PFE), AT&T (T)
- Expense ratio: 0.38 percent
- Assets under management: ~$19.0 billion
ProShares S&P 500 Dividend Aristocrats ETF (NOBL)
NOBL tracks the S&P 500 Dividend Aristocrats Index, focusing on companies with a consistent history of increasing dividends for at least 25 years.
- Fund’s dividend yield: 2.2 percent
- Top holdings: C.H. Robinson Worldwide (CHRW), Walmart (WMT), Essex Property Trust (ESS), S&P Global (SPGI)
- Expense ratio: 0.35 percent
- Assets under management: ~$11.8 billion
How dividends work
Dividend payments are typically distributed to shareholders quarterly, although companies may also issue special dividends as one-time bonuses. To receive an upcoming dividend, a shareholder must own the company’s stock up to and including the ex-dividend date.
Investors pay close attention to the dividend yield, which indicates how much a company or fund pays in relation to its stock price. Dividend yields are calculated by dividing the annual dividend payment by the share price, expressed as a percentage. It’s important to consider a company’s overall financial health before making investment decisions, as dividends are just one aspect of a company’s performance.
How to invest in dividend ETFs
Creating a solid dividend investment strategy can be a valuable addition to an investor’s portfolio. Dividends have historically played a significant role in the total returns of the S&P 500, with dividends reinvested leading to even higher returns over time.
When selecting dividend ETFs, consider the following steps:
- Determine your financial goals: Align your investment choices with your objectives, whether it’s income generation or long-term growth.
- Research dividend funds: Evaluate factors such as dividend history, yield, performance, expense ratios, holdings, and assets under management before investing.
- Outline your asset mix: Maintain a diversified portfolio by assessing your current holdings and allocation strategies.
- Know what you own: Stay informed about your investments, seek guidance from financial professionals, and regularly review your portfolio to make necessary adjustments.
Like any investment, dividend ETFs come with risks that are influenced by the fund’s composition and market conditions. Understanding the level of risk associated with different ETFs can help investors make informed decisions based on their risk tolerance and investment goals.
Are dividend ETFs a good investment for you?
Investing in dividend-focused strategies can be beneficial for individuals at various stages of their investment journey:
- Dividend payments can contribute to wealth accumulation over time, particularly as companies distribute earnings to shareholders.
- For those seeking income from investments, dividends can provide a reliable source of cash flow, especially for retirees.
Consider your financial objectives and whether dividend ETFs align with your investment goals. Working with a brokerage that offers dividend reinvestment options can accelerate the compounding of your investment returns.
What to look for in a dividend ETF
When choosing a dividend ETF, consider the following factors:
- Fees: Understand the fund’s expense ratio to assess the impact on your returns.
- Yield: Pay attention to the ETF’s yield to estimate potential income over the next year.
- Track record of returns: Evaluate the fund’s performance history to ensure it aligns with your investment objectives.
- Portfolio makeup: Review the fund’s holdings to gauge diversification and exposure to specific industries or companies.
How are dividends taxed?
Dividend distributions in taxable investment accounts are subject to taxation as regular income or at reduced rates based on specific criteria. Tax-advantaged accounts like 401(k)s and IRAs offer tax benefits on dividends and capital gains, exempting them from taxation.
Bottom line
Historically, dividends have played a significant role in generating income for investors and building wealth over time. By investing in dividend ETFs, individuals can access a diversified portfolio of dividend-paying companies, enhancing income potential and portfolio stability.
Editorial Disclaimer: All investors are encouraged to conduct their own research on investment strategies before making decisions. Past performance of investment products does not guarantee future price appreciation.