10 Best Dividend ETFs to Buy Now
These top ETFs pay dividends and might be right for your portfolio
One smart way to begin your search for the best dividend-paying ETF is first to identify your dividends needs and how they fit into the "big picture" of your investment portfolio and objective. You can then look at particular qualities, such as high yield, low expenses, and investment style.
It's also smart to have a clear understanding of how ETFs work and which investment accounts are best for investing with ETFs. Before jumping to the list of best dividend ETFs, start with the basics 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 funds. They can be 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 fund's underlying assets. Instead, 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. Passive management means 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, 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 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, as mentioned in the bullet points above. 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 because the low relative selling of underlying holdings means fewer 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.
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 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.
To find the best dividend ETFs for you, some qualities to look for will 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 some of the best dividend ETFs to buy.
This dividend ETF from Vanguard tracks the FTSE High Dividend Yield Index. As of November 2019, the fund represents almost 400 stocks that produce high dividend yields. The SEC yield for VYM is 3.77%, and the expense ratio is rock-bottom 0.06% or $6 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 U.S. Dividend Achievers Select Index (formerly known as the 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%.
This dividend ETF 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 relatively high at 4.61%, and the expenses are 0.39%.
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 SEC yield is 4.67%, and the expense ratio is a low 0.08%.
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 149 stocks of dividend-paying companies. The SEC yield for CVY is 6.43%, and the expense ratio is 0.97%.
This dividend ETF from Invesco achieves its high yields by concentrating the portfolio on stocks of companies in the financial sector. The expense ratio is extremely high, at 1.58%, but the current SEC 30-day yield of 12.93% is also extremely high. KBWD tracks the KBW Nasdaq Financial Sector Dividend Yield Index, which consists of about 40 holdings, mostly small-cap stocks in the financial sector.
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 SEC yield for SDOG is 5.31%, and the expense ratio is 0.40%.
One of only a handful of ETFs to earn a five-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—a selection of over 100 dividend stocks. The current yield for SDY is 3.44%, and the expense ratio is 0.35%.
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% of the market capitalization of the WisdomTree Dividend Index after the 300 largest companies have been removed." DES has over 700 holdings, and the expense ratio is 0.38%.
Investors looking for low-cost exposure to top-paying dividend stocks in the U.S. will want to 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%, and the expense ratio is a cheap 0.06%.
The Bottom Line
Now you have it—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.
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.