Ready to begin your search for the best dividend-paying ETF? A good way to start is by first taking a look at your needs and how dividends fit into the "big picture" of your portfolio. You can then look at qualities such as high yield, low expenses, and investment style.
It's also smart to have a clear picture of how ETFs work and which accounts are best for investing with ETFs. Before jumping to the list of best dividend ETFs, start with the basics. Then you can be sure they're a smart choice for you and your investing needs.
What You Should Know Before You Invest in ETFs
Even if you feel comfortable investing in ETFs, it's smart to revisit the basics of how ETFs work and how to use them.
Here are the basic things to know about ETFs before you invest.
- ETF stands for exchange-traded funds. ETFs are like a hybrid of stocks and mutual funds.
- ETFs trade intraday 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 fund's underlying assets. Instead, they own shares of the fund itself. This then buys shares of the underlying assets.
- Like index funds, ETFs are passively managed and track a benchmark index. ETFs have low holdings 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; mutual funds often require an initial investment of $1,000 or more.
To sum up these points, ETFs work like index mutual funds. But they often have lower expenses, which can increase long-term returns and are easy to buy.
ETF Taxation and Best Account Types for Dividend ETFs
One of the biggest benefits of ETFs comes from low holdings turnover. Low turnover means that there are minimal buying and selling of the underlying holdings during any given year. And when a fund has low turnover, taxes are generally lower. This is because the low relative selling of underlying holdings means fewer capital gains passed on to the ETF shareholder.
Note that ETF shareholders can be taxed on a fund’s dividends. This is the case even if these distributions are received in cash or reinvested in buying more 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.
If you buy and hold dividend ETFs, you may want to consider holding them in a tax-deferred account such as a traditional IRA or Roth IRA.
The Best Dividend ETFs for Your Portfolio
In this list of the best dividend ETFs, we include funds with a range of objectives and styles. In other words, these ETFs are not always those that pay the highest dividends. For instance, 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.
To find the best dividend ETFs for you, some factors to look at include the current yield (or 30 Day SEC yield), the expense ratio, and the investment objective.
With that said, and in no particular order, here are 10 of the best dividend ETFs to buy.
1. Vanguard High Dividend Yield (VYM)
This dividend ETF from Vanguard tracks the FTSE High Dividend Yield Index. The fund represents almost 400 stocks that produce high dividend yields. The SEC yield for VYM is 3.77%; the expense ratio is rock-bottom 0.06% or $6 for every $10,000 invested.
2. Vanguard Dividend Appreciation (VIG)
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 U.S. Dividend Achievers Select Index, which covers about 182 dividend stocks. The SEC yield for VIG is 1.98%, and the expense ratio is 0.06%.
iShares Select Dividend Index (DVY)
DVY from BlackRock tracks an index of roughly 90 stocks that have a record of paying dividends for the past five years. The SEC yield is fairly high at 4.61%, and the expenses are 0.39%.
4. iShares Core High Dividend (HDV)
HDV is a dividend ETF that provides exposure to about 75 dividend-paying U.S. stocks. According to the parent company BlackRock, they all "have been screened for financial health." The SEC yield is 4.67%; the expense ratio is a low 0.08%.
5. Invesco Zacks Multi-Asset Income (CVY)
If you don't mind paying higher expenses to get higher yields, you may like what you see in this ETF. The fund tracks the Zacks Multi-Asset Index, which consists of 149 stocks. The SEC yield for CVY is 6.43%, and the expense ratio is 0.97%.
6. Invesco KBW High Dividend Yield Financial Portfolio (KBWD)
This dividend ETF from Invesco achieves its high yields by concentrating the portfolio on stocks of firms in the financial sector. The expense ratio is very high, at 1.58%. But the current SEC 30-day yield of 12.93% is also quite high.
KBWD tracks the KBW Nasdaq Financial Sector Dividend Yield Index, which consists of about 40 holdings. These are mostly small-cap stocks in the finance sector.
7. ALPS Sector Dividend Dogs (SDOG)
If you're looking to get dividends from "Dogs of the Dow" stocks, think about adding SDOG to your portfolio. SDOG tracks the S-Network Sector Dividend Dogs Index. This starts with the S&P 500 index; then, it screens at the sector level to create a diverse mix of stocks. The SEC yield for SDOG is 5.31%. The expense ratio is 0.40%.
8. SPDR S&P Dividend (SDY)
This dividend ETF is one of only a handful of ETFs to earn a five-star rating from Morningstar. It's also among the best funds with reasonable fees. SDY tracks the S&P High Yield Dividend Aristocrats Index, which is a selection of over 100 dividend stocks. The current yield for SDY is 3.44%, and the expense ratio is 0.35%.
9. WisdomTree U.S. SmallCap Dividend Fund (DES)
In some cases, it makes sense to diversify away from the typical large-cap dividend ETF. It could be a smart idea to add a good small-cap dividend ETF to the mix. DES is one of the best ETFs to help meet this goal.
DES tracks the WisdomTree U.S. SmallCap Dividend Index. According to WisdomTree, this is an index "comprised of the companies that compose the bottom 25% of the market capitalization of the WisdomTree Dividend Index after the 300 largest companies have been removed." DES has over 700 holdings; the expense ratio is 0.38%.
10. Schwab U.S. Equity Dividend (SCHD)
If you're looking for low-cost exposure to top-paying dividend stocks in the U.S., 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 SEC yield is 3.80%. The expense ratio is a cheap 0.06%.
The Bottom Line
Now you know the best dividend ETF funds from a diverse selection of choices. Remember that the most important aspect of selecting the best ETFs for your investment objectives is selecting the investment that best aligns with your time horizon and risk tolerance.
Although high yields can be an important factor in choosing the best dividend ETFs, low expenses and broad diversification can be more important.
Frequently Asked Questions (FAQs)
What type of investment profile is best suited to dividend ETFs?
Dividend investing works best for long-term buy-and-hold investors and current income investors. The effects of dividends are compounded over time when they are reinvested. Other investors depend on dividends for income to live.
What types of stocks are in dividend ETFs?
The types of stocks that issue dividends are most likely to be large-cap, stable, profitable businesses. These businesses are already large, so they're unlikely to grow significantly. In place of those capital gains you could experience with growth in another company, a large company will offer dividend payments throughout the year to entice investors.
When do ETFs pay dividends?
ETFs and stocks have a lot of flexibility in when they choose to issue dividends. Aside from some rules that come into play after a dividend is announced, there aren't any legal requirements about how often or when exactly companies have to pay them. You can expect most dividend-issuing securities to distribute dividends quarterly, but others may do so more or less frequently.
How long do you have to hold an ETF to get the dividend payment?
You have to buy an ETF before the ex-dividend date and hold it until the ex-dividend date to get the dividend. Each company will identify the ex-dividend date when they announce the dividend.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.