Published on October 16th, 2017
This is a guest contribution by Harrisson Dawson. He is one of the authors at Investing PR, where he shares his insights on stocks, bonds or mutual funds with individuals interested in investing wisely
When it comes to buying stocks that pay dividends, many people will just look at the current list of dividend aristocrats. These are companies that have raised dividends for at least 25 years in a row. Buying each of these companies might take a few years because most investors do not start out with huge sums of money to immediately buy what they want. That’s where dividend ETFs can come into play.
ETFs provide a strong level of diversification like mutual funds while also providing the ability to trade in real time like individual stocks. Whether investors are looking for a good oil ETF or one that looks to follow a given index, there are options that will work for their goals. Here are seven ETFs that can provide dividend income for investors.
Vanguard High Dividend Yield ETF
This fund from Vanguard, known by the ticker symbol VYM, focuses on companies that pay a nice dividend yield. This does not mean that Vanguard is on the lookout only for yield. There are solid companies like Johnson & Johnson in this fund. JNJ pays out a yield of less than 3 percent, yet it’s a major holding in the high dividend yield ETF.
One of the benefits of this fund is its low expense ratio. Vanguard charges only 0.08 percent of an investor’s holdings as a fee. This is well below the average that brokers charge for similar funds.
Vanguard Dividend Appreciation ETF
While there are some decent yielders in the Vanguard Dividend Appreciation ETF (VIG), this fund has a focus on companies that not only pay dividends but also raise them on a regular basis. The idea behind the dividend growth strategy is a stream of dividends that grows in excess of inflation over the long run.
Like the high-yield fund that Vanguard offers, VIG comes with a low management fee. This fee equals that of VYM at 0.08 percent, which means that investors pay less for holding this fund. This little fact contributes to much higher overall returns over a lengthy period of time as the management fees compound just like interest and dividends.
Vanguard International Dividend Appreciation ETF
This fund from Vanguard has a similar investing premise as VIG. However, it allows for international exposure for those who are looking to expand their investment holdings outside of the USA. VIGI charges a management fee of 0.25 percent, which is higher than Vanguard’s US-based dividend ETFs. It’s important to remember that this fund will frequently offer returns that are different that US-focused dividend ETFs.
PowerShares Dividend Achievers Portfolio
This dividend ETF, which trades under the ticker of PFM, attempts to find dividend-paying stocks that pay out a nice dividend. The yield on this fund is higher than that of the S&P 500, and it comes with a management fee of 0.40 percent. This is higher than the Vanguard funds, but it is still not as high as some more actively managed funds.
The top holdings of PFM include familiar names. Some of these companies are parts of the Dividend Aristocrat list, which means that these companies have paid out a growing stream of dividends for at least 25 years straight. Included in this list are:
O’Shares FTSE US Quality Dividend ETF
This fund from O’Shares attempts to seek out quality while cutting down on volatility. Ideally, this means that the companies that OUSA invests in will provide continuing returns for investors while experiencing ups and downs that are less extreme than the market as a whole.
This fund has a net expense ratio of of 0.48 percent, which is higher than that offered by Vanguard, but lower than many actively managed funds. This fund is intended to be passively managed based upon its selection criteria. Investors who are interested in dividend payments will appreciate the fact that OUSA pays out its distributions on a monthly basis. While the payments vary from month to month, they do provide a steadier stream of income than those funds that pay quarterly.
Fidelity Core Dividend ETF
According to Fidelity, this fund attempts to reflect the performance of large- and mid-cap stocks that currently pay dividends and that are expected to continue pay out and grow their dividends over the long haul. The expense ratio on this ETF comes in around the midpoint of those listed in this piece. The net expenses come in at just 0.29 percent of the fund’s value.
The yield on this fund is well above that offered by the S&P 500, and there are many familiar names among the largest holdings of the Core Dividend ETF, which trades under the ticker of FDVV. The fund focuses on US companies, so when the US economy does well, this fund should also do well. Regardless of the direction of the Dow or the S&P, this fund should continue to pay out distributions to investors.
Vanguard Total Stock Market Index Fund
Why would a broader index fund land on a list of dividend ETFs? Because it pays a dividend. The Vanguard Total Stock Market Index Fund pays distributions to investors on a quarterly basis. These dividends largely track the overall market, but they are not insignificant.
These distributions have rolled toward investors since the fund’s inception, and they’ve increased nearly fourfold since that time. This is some serious dividend growth, to say the least. Additionally, the fund has an extremely low net expense ratio of only 0.04 percent. Those who reinvest these distributions can grow their income over time.
When looking into dividend ETFs, it’s important to look at a number of factors. The geographic area of the world that an investor wants to focus on should come into play. The strategy of the fund should come into play as well. Does the ETF focus on high yield stocks, or is it looking to see dividend growth potential?
Finally, one of the biggest drags on returns is the expense ratio. There are plenty of dividend ETFs that offer expense ratios of less than 0.5 percent. Lower fees allow returns to compound, rather than expenses, and this is definitely a factor to take into account when making an investment in an ETF.
For a data-driven answer to the best dividend ETF, see this article: The Best Dividend ETF: Data-Driven Answers