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For investors looking for a steady stream of income besides capital appreciation, high-dividend ETFs can be a good option. Investors find ETFs attractive because of their low costs and flexibility and because these types of funds focus only on dividend-paying stocks.
Before you consider investing in high-dividend ETFs, you need to figure out how they fit on your overall investment plan.
Let’s take a quick look at how ETFs work and why they are so popular with investors. In addition, we’ll review the best high-dividend ETFs so you can decide which ones work best with your investment strategy.
What are ETFs?
ETFs are funds comprising stocks from many companies. High-dividend funds only focus on stocks that also pay a healthy dividend. While mutual funds trade at the end of the day, ETFs can be day-traded just like stocks.
It’s important to keep in mind that mutual funds and ETFs are not insured by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. Even if the fund carries the name of a bank and you purchase it through that entity, you may still lose money.
When you invest in an ETF, you don’t directly own the underlying assets of the fund. Instead, you own shares of the fund. Your money goes toward buying shares of the underlying assets.
ETFs have lower fees than mutual funds because they follow a benchmark index. The goal is to offer investors earnings that match the return of the benchmarked index minus the cost of running the fund.
A single share of an exchange-traded fund can give you exposure to hundreds of different stocks, which minimizes the risk of investing in individual stocks.
Keep in mind that there are ETFs that allow you to invest not just in stocks but also in commodities, bonds, and other types of investments. This can be especially attractive if you want to dip your toe in the commodities market.
Another great feature of exchange-traded funds is the lower expense ratios as compared to traditional mutual funds. Because ETFs follow an index, thus requiring less maintenance, the cost to run them is lower so more of the fund’s returns get paid out to investors.
Best high-dividend ETFs
Exchange-traded funds that focus on dividend stocks can be attractive for investors looking for income to cover living expenses. Unlike other types of income, dividends may qualify for special treatment under the tax law. They also offer the advantage of value appreciation of the underlying asset.
Let’s look at the top high-dividend ETFs based on their current returns, keeping in mind that yields can change if companies cut the dividends they pay on their stocks. The funds are ordered by the total assets under management.
Vanguard Total Stock Market ETF (VTI)
The Vanguard Total Stock Market ETF (VTI) tracks the performance of the CRSP US Total Market Index. It’s made of diversified small-, mid-, and large-cap equity shares.
The fund remains fully invested and offers a very low expense ratio of 0.03 percent, making it an attractive investment. Dividends are paid out quarterly and the current dividend yield is 1.8 percent. It’s composed of more than 3,600 stocks with fund total net assets of $823 billion.
The VTI fund also offers equity sector diversification with its largest holdings in technology, financials, consumer services, and industrial areas.
Vanguard Dividend Appreciation ETF (VIG)
The Vanguard Dividend Appreciation ETF (VIG) tracks the performance of the NASDAQ US Dividend Achievers Select Index. The focus of the fund is in tracking stocks of companies that have a history of growing their dividends year-over-year.
While the fund’s expense ratio is not as low as that of VTI, it’s very reasonable at 0.06 percent. The current annual dividend yield for the fund is 1.81 percent and dividends are paid out every quarter. The fund comprises 184 stocks and the total net assets are more than $45 billion.
Investing in this fund offers equity sector diversification with the largest percentage invested in stocks in the industrial, consumer services, and health care companies.
Vanguard High-Dividend Yield ETF (VYM)
The Vanguard International High-Dividend Yield ETF (VYM) tracks the performance of the FTSE All-World US High-Dividend Yield Index. It offers a convenient way for investors to include international stock exposure in their portfolios while enjoying above-average dividend yields.
Expense ratio for the fund is not as low as VTI or VYG but it’s still reasonable at 0.32 percent. Current annual dividend yield for the fund sits at 3.26 percent and pay out every quarter. The ETF consists of 1,022 stocks with the fund’s total net assets sitting at $1.3 billion.
The 10 largest holdings comprise 16.1 percent of net assets with 47 percent focused on Europe. In addition, nearly 22 percent of the fund is invested in emerging markets.
SPDR S&P Dividend ETF (SDY)
The SPDR S&P Dividend ETF (SDY) tracks the performance of the S&P High-Yield Dividend Aristocrats Index. It focuses on companies that have a track record of increasing their dividend for at least 20 years. The stocks are weighted by yield.
The SDY exchange-traded fund has an expense ratio similar to VYM at 0.35 percent. Dividends are distributed quarterly and the current annual dividend yield is 2.47 percent. It consists of 112 holdings with the fund’s total net assets sitting at nearly $18.3 million.
The largest percentage of the fund is invested in the industrial, financials, and consumer staples sectors.
Shares Select Dividend ETF (DVY)
The iShares Select Dividend ETF (DVY) tracks the performance of broad-cap U.S. companies that show a consistent history of paying dividends. It’s made up of 100 U.S. stocks that have consistently paid dividends over a five-year period.
The DVY fund has the highest expense ratio compared to the previous four funds at 0.39 percent. Dividends are paid out every quarter and the current annual dividend yield is 3.36 percent. It has a net asset value of more than $17 million and holds 100 high-dividend U.S. stocks.
The highest percentage of the fund is invested in the utilities sector with the next largest holdings in consumer discretionary and financials.
Other ETFs to consider
Besides the funds listed above, there are many other options that track a variety of indexes. Below is a list of other high-dividend ETFs that you may want to consider when building a dividend income portfolio:
Vanguard Total World Stock ETF (VT )
Schwab US Dividend Equity ETF (SCHD)
iShares Core Dividend Growth ETF (DGRO)
iShares Core High Dividend ETF (HDV)
First Trust Value Line Dividend Index (FVD)
FlexShares Morningstar Global Upstream Natural Resources Index Fund (GUNR)
Invesco FTSE RAFI US 1000 ETF (PRF)
Schwab Fundamental U.S. Large Company Index ETF (FNDX)
ProShares S&P 500 Aristocrats (NOBL)
iShares MSCI EAFE Value ETF (EFV)
Schwab Fundamental International Large Company Index ETF (FNDF)
iShares International Select Dividend ETF (IDV)
The bottom line on high-dividend ETFs
Investing in high-dividend exchange-traded funds can be a great way to add diversity to your portfolio. Going with a fund that invests in a specific sector or type of company can help you balance out your investments without purchasing individual stocks.
Some investors buy high-dividend ETFs as a way to generate income and cover living expenses. Dividend income is taxed at a different rate than ordinary income. Consult with a tax professional before investing in dividend stocks.
Keep in mind that high-dividend exchange-traded funds tend to have a higher risk profile. They also come with a cost although their expense ratios are lower than mutual funds.
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