Stock gains aren’t the only way to get ahead in the market. A focus on dividend stocks—which you can purchase in bulk through dividend exchange-traded funds (ETFs)—can help you generate another type of return by sharing directly in the profits of a company via regular payouts to your investment account.
Today, I’m going to help you dive into dividend ETFs. I’ll give you a quick primer on dividend stocks, discuss why you might want to buy dividend funds to get exposure to these stocks, and list what I believe are some of the best dividend ETFs you can buy.
Disclaimer: This article does not constitute individualized investment advice. These funds appear for your consideration and not as personalized investment recommendations. Act at your own discretion.
What Is a Dividend Stock?
A dividend is a cash payment from a company to shareholders. Companies that regularly provide these cash payments are referred to as dividend stocks.
Often, investors favor dividend stocks because, to regularly pay out those dividends, they have to generate consistent and significant profits—a good sign that the company is financially healthy and well-managed.
Why Invest in Dividend Stocks via ETFs?
The best dividend ETFs offer you a way to invest in many of these presumably high-quality stocks with just one purchase.
As a group, dividend stocks are pretty common, but they’re not created equally. Some companies only pay nominal dividends that are just a penny or two per share, with no prospect for dividend growth anytime soon. Others may offer generous but unsustainable dividend payouts that might be eliminated altogether in the future.
That’s why exchange-traded funds are a good alternative to individual dividend stocks. ETFs spread your money around, rather than force you to rely on one company’s specific strengths and weaknesses. And finding the best stocks capable of consistently paying dividends and enjoying significant future dividend growth can be a daunting task, even for seasoned investors. So instead, why not try to gain exposure to dividend-paying stocks via a single, diversified holding that’s tasked with finding great companies for you?
That’s what you’ll get in a dividend ETF.
A Note About Dividend Yields
A term you’re going to want to familiarize yourself with is dividend yield.
A dividend yield tells you how much of your investment you can expect to get back in the form of dividends. A stock’s dividend yield, for instance, is calculated on an annualized basis, and expressed as a percentage of share price. Example: If a stock trades for $50 and pays 25 cents per quarter, that’s $1.00 in annual payouts—or 2.0% of the share price. So its dividend yield is 2.0%.
But a fund’s dividend yield is calculated a little differently. It’s much more difficult to estimate future payouts for an ETF or mutual fund because they own groups of many different stocks paying on changing cycles.
The fairest way to measure yield in dividend ETFs and mutual funds is to calculate the distributions over the last calendar year. Dividends might change for these funds going forward, but a trailing 12-month look is the most faithful way to calculate yield.
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Our Favorite Dividend ETFs
As is so often the case, the best dividend ETF for each investor depends on the individual’s personal goals. There are many ways to invest for yield; the following list of options should provide something that fits in most portfolios.
Best Dividend ETF #1: Vanguard Dividend Appreciation ETF
- Assets under management: $86.1 billion
- Expense ratio: 0.06%, or $6 per year on every $10,000 invested
- Dividend yield: 1.7%
The place to start if you’re looking for the best dividend ETFs is the Vanguard Dividend Appreciation ETF (VIG). This is the largest dividend ETF by assets, and one of the cheapest funds out there to boot.
However, unlike most dividend ETFs where dividend yield is the point, VIG focuses on companies that grow their dividends—another sign of corporate financial quality.
This Vanguard index fund is benchmarked to the S&P U.S. Dividend Growers Index, which holds stocks that have consistently improved their payouts every year for at least 10 consecutive years. (Interestingly, the index excludes the 25% highest-yielding companies that would be eligible to be in the index.)
Currently, VIG holds roughly 310 top dividend stocks in the U.S., led by tech giants Microsoft (MSFT) and Apple (AAPL), insurance titan UnitedHealth Group (UNH), and mega-bank JPMorgan Chase (JPM). It’s also weighted by size, which means the bigger the stock, the more influence it has on the portfolio. Those prior four companies? They represent more than 16% of the portfolio!
The upside? These are very stable, decent-paying stocks. The downside? The ETF’s yield, while a little bit higher than the S&P 500, isn’t as generous as many of the other dividend ETFs on this list.
Learn more about VIG at the Vanguard provider site.
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Best Dividend ETF #2: Vanguard High Dividend Yield Index ETF
- Assets under management: $58.5 billion
- Expense ratio: 0.06%, or $6 per year on every $10,000 invested
- Dividend yield: 2.7%
If you’re more concerned about a high dividend yield but want to stick with Vanguard ETFs, consider the Vanguard High Dividend Yield Index ETF (VYM).
VYM offers an expanded portfolio of about 460 total stocks and focuses on companies with a history of paying higher-than-average yields. The result is an ETF yield that’s currently about twice that of the S&P 500. Like VIG, big stocks have the largest effect on performance. At the moment, top holdings include Big Oil firm Exxon Mobil (XOM) and financial giant JPMorgan Chase.
Best of all, VYM shareholders benefit from Vanguard’s super-low-cost approach—its 0.06% expense ratio makes it one of the cheapest high-dividend ETFs on offer.
Learn more about VYM at the Vanguard provider site.
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Best Dividend ETF #3: iShares Core Dividend Growth ETF
- Assets under management: $30.4 billion
- Expense ratio: 0.08%, or $8 per year on every $10,000 invested
- Dividend yield: 2.2%
The iShares Core Dividend Growth ETF (DGRO) is another well-established and cost-effective dividend ETF. And like VIG, it is committed to dividend growth rather than dividend yield.
Specifically, companies in the index must pay a qualified dividend, boast at least five years of uninterrupted annual dividend growth, and have an earnings payout ratio of less than 75%. (This last number means a company can spend no more than 75% of its profits to pay its dividends.) And prior to screening its available universe of stocks for dividend growth and payout ratio, it excludes the top 10% of dividend yields—a similar filter to VIG.
All of this means DGRO holds dividend growers that aren’t stretching to afford their dividend payments. The ETF doesn’t have a high current dividend yield, but investors who plan to buy and hold for many years could see the dividend payments grow significantly over time.
About 430 stocks make the cut, with the typical mega-cap names at the top of the list. That includes tech stocks like Apple and Microsoft whose yields might not be particularly generous now but are likely to grow their payouts in the years to come.
Learn more about DGRO at the iShares provider site.
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Best Dividend ETF #4: ProShares S&P 500 Aristocrats
- Assets under management: $12.6 billion
- Expense ratio: 0.35%, or $35 per year on every $10,000 invested
- Dividend yield: 2.5%
A dividend fund that takes the idea of a long dividend-growth track record even farther is the ProShares S&P 500 Aristocrats ETF (NOBL). This ETF focuses on the S&P 500 Dividend Aristocrats—an elite group of stocks that have increased their payouts for at least 25 consecutive years (though often much longer).
In case you don’t know your market history, 25 years spans not just the pandemic and war in Ukraine, but also the global financial crisis of 2008 … even the dot-com boom and bust in 1999-2000!
The Dividend Aristocrats are a tight group of fewer than 70 stocks. And like with other dividend ETFs that mostly focus on payout growth, NOBL doesn’t offer a very large payday. Still, if you want to prioritize stability and consistency in your dividend payments, this fund is worth a look.
Learn more about NOBL at the ProShares provider site.
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Best Dividend ETF #5: Global X SuperDividend ETF
- Assets under management: $812.5 million
- Expense ratio: 0.58%, or $58 per year on every $10,000 invested
- Dividend yield: 10.7%
While some of the dividend ETFs on this list yield more than others, none have even been able to top the current payout of 10-year U.S. Treasury bonds.
So, you might be wondering: “Where are the high dividend yields?”
The Global X SuperDividend ETF (SDIV) is what you’ve been waiting for. It prioritizes yield above all else, generating a current payout of more than 11% that’s nearly seven times that of the S&P 500, and roughly three times what 10-year T-notes yield.
Global X’s fund definitely does not look like most other dividend ETFs. More than a third of the fund’s assets are invested in financial companies, with big chunks in real estate (33% of total assets), energy (16%), and materials (14%). So the way it’s constructed right now, SDIV is very sensitive to moves in interest rates and property prices. Also worth noting: Only a third of holdings are in U.S. companies right now; 20% of the portfolio is roughly evenly split between Brazil and Argentina.
We hope that it goes without saying that the much higher rewards come with much higher risk. SDIV really is all about high dividend yield—but quality simply isn’t as important. The index’s only real quality check is a periodic review for dividend stability (Global X gives this example: “no official announcement as of the Selection Day that dividend payments will be canceled or significantly reduced in the future.”)
In other words: SDIV is good for aggressive investors who want high income. But people looking for stability might want to search elsewhere.
Learn more about SDIV at the Global X provider site.
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Best Dividend ETF #6: Vanguard Real Estate ETF
- Assets under management: $38.7 billion
- Expense ratio: 0.13%, or $13 per year on every $10,000 invested
- Dividend yield: 3.7%
Another way to get higher yield is to focus on the income-producing potential of real estate investments. And you can do that via the Vanguard Real Estate ETF (VNQ).
As the name implies, this dividend ETF is focused solely on real estate investment trusts (REITs) and related investments. So, the companies in this fund own all sorts of real estate—from office buildings and apartments to hotels and even driving ranges. Currently, top holdings include industrial property and warehouse owner Prologis (PLD), telecom infrastructure company American Tower (AMT), and other non-traditional real estate investments.
REITs are required to pay out at least 90% of their profits to shareholders, which they do in exchange for favorable tax treatment. As a result, real estate tends to be one of the highest-yielding sectors; VNQ’s ~4% yield is well more than double that of the S&P 500.
But keep in mind that while there are about 160 stocks in this dividend ETF, they are in many ways interrelated. That means putting all your eggs into this single sector exposes you more to any volatility from the real estate industry.
Learn more about VNQ at the Vanguard provider site.
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Best Dividend ETF #7: iShares International Select Dividend ETF
- Assets under management: $4.4 billion
- Expense ratio: 0.51%, or $51 per year on every $10,000 invested
- Dividend yield: 6.2%
One flavor of dividend stock we haven’t focused on directly: international companies.
International dividend stocks are a slightly different animal. They often pay less frequently than U.S. dividend stocks—maybe once or twice a year instead of each quarter. Their payouts typically fluctuate more based on seasonal profitability of the companies as well as currency exchange rates. They’re taxed differently, too. But as you can see by the yield of the iShares International Select Dividend ETF (IDV), international stocks tend to be more generous as a group.
This roughly 100-stock dividend ETF’s portfolio includes the world’s largest and most established firms. This includes $120 billion mega-miner Rio Tinto Group (RIO) and $66 billion consumer company British American Tobacco (BTI). The U.K. is the most common source of components, at 15%, but Australia, Canada, South Korea, Japan, and several other countries also have prominent positions in this ETF.
If you yearn for higher yield and want to diversify your portfolio to include international stocks, IDV does the trick.
Learn more about IDV at the iShares provider site.
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Learn More About These and Other Funds With Morningstar Investor
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Frequently Asked Questions (FAQs)
How do dividend ETFs pay investors?
When you own an ETF, you own parts of shares of various dividend stocks with different payout schedules. However, you don’t get paid when those stocks pay out—you get paid based on the ETF’s payout schedule.
Dividend ETFs pay their investors the same way as dividend stocks do, with deposits appearing on your brokerage statement on a regular cycle. Some funds—like the Global X SuperDividend ETF (SDIV)—pay you on a monthly cycle. But the majority, including the other six dividend ETFs on this list, all pay on a quarterly schedule, which is similar to most U.S. dividend stocks.
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