10 Best Dividend ETFs
A List of Top ETFs That Pay Dividends
The smartest way to begin your search for the best dividend ETFs is to identify your need for dividends and how they fit into the big picture of your investment objective.
You can invest in the best ETFs in the investment universe but if they're not the best fit for your investment needs, or if these fund types are not suitable for your risk tolerance, you can make a mistake that can potentially lead to negative returns.
It's also smart to have a clear understanding of how ETFs work and which investment accounts are best for investing with ETFs.
So before jumping to the list of best dividend ETFs, start with basics of these popular investing vehicles to be sure they're a smart choice for you and your investing needs.
Before You Invest in ETFs
Even if you're an experienced ETF investor, it's smart to revisit the basics of how ETFs work and how to use them to your advantage.
Here are the basic things to know about ETFs before you invest:
- ETF is an acronym that stands for exchange-traded fund. They can be simply described as a hybrid of stocks and mutual funds.
- ETFs trade intra-day like stocks; Mutual funds trade at the end of the day, when the net asset value (NAV) of the underlying holdings can be determined.
- Like mutual funds, shareholders of ETFs do not directly own the underlying assets of the fund; they own shares of the fund itself, which then buys shares of the underlying assets.
- Like index funds, ETFs are passively-managed and track a benchmark index. This means ETFs have low turnover compared to actively-managed mutual funds.
- ETFs typically have lower expense ratios compared to even the lowest-priced index mutual funds.
- ETFs have no minimum initial investment amount, whereas mutual funds typically require an initial investment of $1,000 or more.
To summarize these points, ETFs work like index mutual funds but they often have lower expenses, which can potentially increase long-term returns, and they are easy to buy.
ETF Taxation and Best Account Types to Buy and Hold Dividend ETFs
One of the biggest benefits of ETFs comes as a result of the low turnover, as mentioned in the bullet points above. Low turnover means that there is very little buying and selling of the underlying holdings during any given year. And when a fund has low turnover, taxes are generally lower because the low relative selling of underlying holdings means less capital gains passed on to the ETF shareholder.
It is important to note that ETF shareholders can be taxed on a fund’s dividends, even if these distributions are received in cash or reinvested in additional shares of the fund. Also, for certain tax-deferred and tax-advantaged accounts, such as an IRA, 401(k) or annuity, dividends are not taxable to the investor while held in the account. Instead, the investor will pay income taxes on withdrawals during the taxable year the distribution (withdrawal) is made.
Therefore some ETF investors that buy and hold dividend ETFs may want to consider holding them in a tax-deferred account like a traditional IRA or Roth IRA.
List of Best Dividend ETFs
Whenever you see any kind of "best of" list, it's important to know that these lists can be somewhat subjective, meaning that the best for one person, such as the author of the list, may not be the best for another person.
In this list of best dividend ETFs, we include funds with a range of objectives and styles. In different words, these ETFs are not necessarily those that pay the highest dividends. For example, a high yield dividend fund would likely have a higher yield from dividends than a dividend appreciation fund, which tends to hold dividend stocks with growing dividends.
With that said, and in no particular order, here are 10 of the best dividend ETFs to buy:
This dividend ETF from Vanguard tracks the FTSE High Dividend Yield Index, which represents more than 420 stocks that produce high dividend yields. The current yield for VYM is 3.10 percent and the expense ratio is a rock-bottom 0.08 percent, or $8 for every $10,000 invested.
Investors looking to hold a basket of stocks of companies that have a record of growing their dividends can consider buying an ETF like Vanguard's Dividend Appreciation fund. This ETF tracks the NASDAQ US Dividend Achievers Select Index (formerly known as the Dividend Achievers Select Index), which covers about 180 dividend stocks. The current yield for VIG is 1.92 percent and the expense ratio is 0.09 percent.
This dividend ETF from BlackRock tracks an index of roughly 100 stocks that have a record of paying dividends for the past 5 years. The current yield is relatively high at 3.13 percent and the expenses are 0.39 percent.
Investors looking for a dividend ETF that provides exposure to about 75 dividend-paying U.S. stocks that, according to the parent company BlackRock, "have been screened for financial health," should consider HDV. The current yield is 3.35 percent and the expense ratio is a low 0.08 percent.
Investors that don't mind paying higher expenses to get higher yields may like what they see in this ETF. The fund tracks the Zacks Multi-Asset Index, which consists of roughly 100 stocks of dividend-paying companies. The asset allocation is about two-thirds U.S. stocks with the remainder in a mix of foreign stocks and bonds. The current yield for CVY is 4.73 percent and the expense ratio is 0.84 percent.
This dividend ETF from PowerShares achieves its high yields by concentrating the portfolio on stocks of companies in the financial sector. The expense ratio is extremely high at 2.99 percent but the current yield of 9.60 percent is also extremely high. KBWD tracks the KBW Nasdaq Financial Sector Dividend Yield Index, which consists of about 40 holdings, most of which are small-cap stocks in the financial sector. The index, according to PowerShares, "is a modified-dividend yield-weighted index that seeks to reflect the performance of such companies."
Investors looking to get dividends from "Dogs of the Dow" stocks can consider adding SDOG to their portfolio. SDOG tracks the S-Network Sector Dividend Dogs Index, which starts with the S&P 500 index, then screens at the sector level to create a diverse mix of dividend stocks. The current yield for SDOG is 3.59 percent and the expense ratio is 0.40 percent.
One of only a handful ETFs to earn a 5-star rating from Morningstar, this dividend ETF is among the best funds with reasonable fees that cover a broad selection of dividend stocks. SDY tracks the S&P High Yield Dividend Aristocrats Index, which is a selection of about 100 dividend stocks. The current yield for SDY is 2.27 percent and the expense ratio is 0.35 percent.
Sometimes it makes sense to diversify away from the typical large-cap dividend ETF and add a good small-cap dividend ETF to the mix and DES is one of the best ETFs to accomplish this goal. DES tracks the WisdomTree SmallCap Dividend Index, which according to WisdomTree, is an index "comprised of the companies that compose the bottom 25 percent of the market capitalization of the WisdomTree Dividend Index after the 300 largest companies have been removed." The current yield for DES is 3.35 percent and the expense ratio is 0.38 percent.
Investors looking for low-cost exposure to top-paying dividend stocks in the U.S. will want to take a look at SCHD. The fund tracks the Dow Jones U.S. Dividend 100 Index, which includes some of the highest dividend-producing stocks in the U.S. The current yield is 2.95 percent and the expense ratio is a cheap 0.07 percent.
Now you have it — the best 10 dividend ETF funds from a diverse selection of choices. Just remember that the most important aspect of selecting the best ETFs for your investment objectives is to select the best investment vehicles that align with your time horizon and risk tolerance.
Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.