When you're investing for the long run, there's nothing like a sizable allocation to dividend-paying stocks to help you sleep at night. And if cold, hard cash is like a warm, fuzzy blanket, dividend ETFs are like a closet full of quilts.
Admittedly, it's hard to care about gradually building wealth with dividend payments when there are so many flashier things going on.
Be real: How many CNBC and Bloomberg TV spots have you watched about the explosive gains of AI stocks?
OK, now how many spots have you watched about slow trickles of cash?
But what dividend stocks lack in curb appeal, they make up for in substance. From Hartford Funds:
"Dividends have played a significant role in the returns investors have received during the past 50 years. Going back to 1960, 69% of the total return of the S&P 500 Index can be attributed to reinvested dividends and the power of compounding."
Clearly, you don't want to sleep on dividends. But what's the best way to stash them in your portfolio?
You could try to pick and choose dividend-paying stocks. But like with any single-stock investments, you're taking on risk – not just of the company faltering and its share price heading lower but also of management cutting or even eliminating the dividend.
Or, you could spread that risk across dozens, hundreds, even thousands of stocks via dividend ETFs.
The best dividend ETFs
So read on as we discuss the best dividend ETFs for a diversified portfolio.
To find the best ETFs to buy, we narrowed our search to seven funds with low costs and varying strategies.
We also selected ETFs that enjoy Morningstar Gold or Silver Medalist ratings. Morningstar's forward-looking ratings system analyzes a fund's ability to outperform its category in the future.
And we focused on the best dividend ETFs that pay more than the S&P 500's current 1.3% yield, with one fund on the list nearly quadrupling this payout.
Data is as of February 12. Yields represent the trailing 12-month yield, which is a standard measure for equity funds.
| Exchange-traded fund (ticker) | Dividend yield |
|---|---|
| Schwab US Dividend Equity ETF (SCHD) | 3.6% |
| SPDR S&P Dividend ETF (SDY) | 2.5% |
| Vanguard High Dividend Yield ETF (VYM) | 2.6% |
| WisdomTree U.S. Quality Dividend Growth Fund (DGRW) | 1.5% |
| FlexShares Quality Dividend Defensive ETF (QDEF) | 1.8% |
| Vanguard International Dividend Appreciation ETF (VIGI) | 1.9% |
| WisdomTree Emerging Markets High Dividend Fund (DEM) | 5.1% |
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Schwab US Dividend Equity ETF
- Type: Large-cap blend
- Assets under management: $68.0 billion
- Dividend yield: 3.6%
- Expenses: 0.06%, or $6 annually on a $10,000 investment
Let's start with the Schwab US Dividend Equity ETF (SCHD, $27.65), a straightforward, well-rounded solution ideal for buy-and-hold investors looking for a low-cost ETF.
This index fund follows the Dow Jones U.S. Dividend 100 Index, which tracks 100 high-yielding stocks from the Dow Jones U.S. Broad Market Index that have paid dividends for at least 10 consecutive years.
It has quality filters as well, favoring cash flow to total debt, return on equity, five-year dividend growth and dividend yield.
"The index's dividend screen and fundamental considerations breed exposure to the quality factor, which has historically been tied to market-beating returns," says Morningstar analyst Ryan Jackson, explaining the fund's upgrade to a gold Morningstar Medalist rating. "In profitability measures like return on invested capital, the fund comfortably exceeds the Russell 1000 Value Index."
The resultant portfolio is a roughly 100-member group of large-cap dividend stocks. Indeed, the weighted average market capitalization of its holding set is about $134.3 billion – well into mega-cap status.
While it's diversified by sector, some enjoy greater weight than others. Of the 10 sectors where the funds are distributed, seven currently have double-digit exposure, led by financial services (18.5%), healthcare (17.1%) and consumer defensive (14.4%).
Importantly, SCHD intentionally excludes real estate investment trusts (REITs) and master limited partnerships (MLPs).
Top holdings include the likes of AbbVie (ABBV), Amgen (AMGN) and Cisco Systems (CSCO) that help deliver a supple yield of 3.6%. And that's nearly triple the S&P 500's yield.
Investors can purchase all of the above at one of the lowest expense ratios among dividend ETFs. SCHD's 0.06% expense ratio translates into just $6 per year if you have $10,000 invested in the fund.
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SPDR S&P Dividend ETF
- Type: Mid-cap value
- Assets under management: $20.2 billion
- Dividend yield: 2.5%
- Expenses: 0.35%
Let's turn our attention toward dividend growth and look at the SPDR S&P Dividend ETF (SDY, $133.51).
SDY tracks the S&P High Yield Dividend Aristocrats Index. As you might imagine, this is similar to the S&P 500 Dividend Aristocrats but with a few tweaks.
The S&P 500 Dividend Aristocrats are S&P 500 stocks with 25 or more consecutive years of payout hikes. The S&P High Yield Dividend Aristocrats are pulled from the larger S&P Composite 1500, which includes large-, mid-, and small-cap stocks weighted by yield and with 25 years of consecutives hikes.
While you'd imagine dividend growth stocks would offer high yield, that's often not the case.
In fact, many such funds offer yields comparable to or even less than the market. But SDY's dual focus offers both above-average yield as well as dividend growth, which itself is often a sign of healthy, growing businesses.
"SPDR S&P Dividend ETF invests only in the market's most disciplined dividend stocks, breeding a high-quality portfolio that safely pursues yield," says Jackson, who gives SDY a silver Morningstar Medalist rating. "It should continue to offer a more attractive risk/reward profile than the Russell 1000 Value Index."
SDY is somewhat lopsided from a sector perspective. Industrial stocks make up 17.6% of the portfolio, consumer staples 16.6%, utility stocks 16.2% and financials 10.3%. Real estate and energy, meanwhile, account for 5.1% and 4.0% of the portfolio, respectively.
At the same time, no individual stock accounts for more than 2.8% of assets. Top holdings include the likes of Verizon Communications (VZ), Realty Income (O) and Chevron (CVX).
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Vanguard High Dividend Yield ETF
- Type: Large value
- Assets under management: $61.9 billion
- Dividend yield: 2.6%
- Expenses: 0.06%
Another dirt-cheap dividend ETF focused on high yield is (unsurprisingly) offered up by Vanguard.
The Vanguard High Dividend Yield ETF (VYM, $133.15) tracks the FTSE High Dividend Yield Index, which is made up of above average-yielding stocks and, like SCHD, excludes REITs.
VYM offers a much larger selection of stocks than the FTSE High Dividend Yield Index. Its portfolio is made up of roughly 535 dividend payers with a massive median market cap of $140.4 billion.
Financial stocks currently are tops at 22.8% of assets, though technology (14%), consumer defensive (12.6%), healthcare (11.3%) and industrials (11.1%) all enjoy double-digit weights as well, with energy (9.3%) just outside that group.
Top holdings are a who's who of blue chip stocks, among them JPMorgan Chase (JPM), Exxon Mobil (XOM), Johnson & Johnson (JNJ) and Procter & Gamble (PG).
The Vanguard High Dividend Yield ETF, which earns a gold Morningstar Medalist rating, might be worthy of more attention if the U.S. economy slows or enters a recession at some point down the road.
Shaky markets tend to send investors into dividend stocks, which can provide income when stock returns aren't there.
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WisdomTree U.S. Quality Dividend Growth Fund
- Type: Large blend
- Assets under management: $15.4 billion
- Dividend yield: 1.5%
- Expenses: 0.28%
The WisdomTree U.S. Quality Dividend Growth Fund (DGRW, $83.30) simultaneously tells you exactly what it invests in and is unintentionally misleading.
Whereas most "dividend growth" funds are interested in the growth of dividends, the WisdomTree U.S. Quality Dividend Growth Fund is interested in dividends – pause – and growth. As in, good old-fashioned earnings growth.
Got it?
Specifically, DGRW starts with a screening universe that includes any companies with a market cap of at least $2 billion within the WisdomTree U.S. Dividend Index. It then chooses the 300 stocks with the best combined rank of growth and quality factors.
Growth is determined by long-term earnings growth estimates, while quality is based on three-year averages for return on equity (RoE) and return on assets (RoA).
DGRW, then, is a predominantly large-cap portfolio. It's also not terribly balanced.
For one, tech is a full 23.6% of assets, followed by double-digit exposure in industrials (13.5%), consumer staples (13%), healthcare (10.9%), financials (10.8%) and consumer cyclicals (10.4%). But three sectors have weights of 2.3% or less.
Also, the top 10 holdings account for 36.5% the portfolio's weight, and the fund is pretty thick in Microsoft (MSFT) at 7.7% and Apple (AAPL) at 4.8%.
The aim with this fund isn't balance, but the stability imparted by dividends and the upside potential provided by above-average growth.
So far, so good. DGRW is arguably one of the top funds you can buy right now, sporting both a Gold Medalist rating and four Morningstar stars.
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FlexShares Quality Dividend Defensive ETF
- Type: Large value
- Assets under management: $415.0 million
- Dividend yield: 1.8%
- Expenses: 0.37%
Generally speaking, most fund managers would tell you they're trying to invest in high-quality stocks. But certain funds take this a step farther, specifically targeting the "quality factor."
With factor investing, an investor targets certain attributes that they expect to produce higher returns. Low volatility is a factor, for instance, as are value and momentum. Quality is another such factor, and it typically revolves around choosing stocks with strong balance sheets, stable earnings and other signs of operational excellence.
Enter the FlexShares Quality Dividend Defensive ETF (QDEF, $71.96). QDEF tracks the Northern Trust Quality Defensive Index, which aims to create a portfolio that's both high in quality and low on volatility.
The index evaluates all stocks within the Northern Trust 1250 index of large- and mid-cap stocks, then selects dividend payers that score well in management efficiency (e.g., corporate finance activities and corporate governance), profitability and cash flow generation.
Currently, this FlexShares ETF holds 128 dividend stocks that are primarily large in size. However, while it's considered a "large value" fund, just 39.2% of QDEF's portfolio is considered value in nature – the largest chunk, 51.1%, is classified as "core," while the remaining 9.7% is made up of growth stocks.
It's also somewhat imbalanced from a sector perspective. Tech stocks make up about 30% assets, followed by double-digit holdings in healthcare (12.3%) and financial services (12.2%) and then communications services (9.9%), consumer staples (8.6%), consumer cyclicals (8.1%) and industrials (7.9%)
Top holdings for this Gold Medalist fund are a mix of stocks like Apple, Nvidia (NVDA) and Microsoft that you might not expect to garner top billing in many dividend ETFs as well as classics such as International Business Machines (IBM) and Johnson & Johnson.
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Vanguard International Dividend Appreciation ETF
- Type: Foreign large growth
- Assets under management: $7.3 billion
- Dividend yield: 1.9%
- Expenses: 0.10%
The Vanguard International Dividend Appreciation ETF (VIGI, $83.11) has the same thrust as other dividend growth ETFs — it simply applies its strategy to international stocks.
VIGI tracks the S&P Global Ex-U.S. Dividend Growers Index, a free-float adjusted market cap-weighted index made up of both large- and mid-cap stocks based in developed and emerging markets alike.
The index selects companies that have improved their dividends for at least seven consecutive years. It then removes the highest-yielding stocks, a filter meant to improve portfolio quality and eliminate potential dividend cutters in the future.
Lastly, stocks are capped at 4% weights at each year's rebalancing to avoid dedicating too many assets to any one company.
VIGI's portfolio has roughly 330 holdings, and it tilts heavily toward large-cap stocks, with roughly 88% of assets dedicated to bigger companies. While VIGI can hold emerging market stocks, they currently only command a 9.1% weight.
Instead, the ETF favors developed Europe (47.1%), Pacific (30.9%) and North America (12.9%). Top country allocations at present include Japan (26.5%), Switzerland (16.0%), Canada (12.9%) and the U.K. (8.9%).
While VIGI focuses on dividend growers rather than high yielders, it's still chock-full of international blue chips such as SAP (SAP), Novartis (NVS), Novo Nordisk (NVO) and Nestle (NSRGY).
"Vanguard International Dividend Appreciation effectively captures high-quality firms with consistent dividend growth that should offer attractive long-term performance," says Morningstar director Bryan Armour. "Its established constituents insulate the portfolio from volatility and should lead to a long-term risk-adjusted advantage."
That makes VIGI one of the best dividend ETFs you can buy and one of the top offerings from Vanguard, period.
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WisdomTree Emerging Markets High Dividend Fund
- Type: Large value
- Assets under management: $2.8 billion
- Dividend yield: 5.4%
- Expenses: 0.63%
Typically, investors look to emerging markets for growth, but the WisdomTree Emerging Markets High Dividend Fund (DEM, $41.70) taps EMs for high yield.
Really, really high yield.
DEM tracks the WisdomTree Emerging Markets High Dividend Index, a fundamentally weighted index that pulls its selections from the WisdomTree Emerging Markets Dividend Index. Specifically, it takes the highest 30% ranked by dividend yield and then weights them by annual cash dividends paid.
This is a wide portfolio of 481 emerging market stocks, primarily large cap (60.8%) in nature, though it has plenty of mid-cap stocks (22.0%) and a decent store in small caps (14.1%).
The fund isn't very top-heavy, either. State-owned financial firm China Construction Bank is DEM's biggest holding at 4.2%, and the top 10 holdings only account for 24.8% of assets.
DEM is, however, geographically lopsided. Chinese stocks make up 24.1% of assets, followed by Taiwan at 19.4% and Brazil at 11.7%. Most of the other countries enjoy only token representation.
While WisdomTree's ETF is a whopper of a high-yield pick, the dividends aren't exactly as consistent as what you'll find here in the U.S. Some of its massive yielders — names such as Petroleo Brasileiro (PBR) and Vale (VALE) — have exceedingly variable dividends.
Even then, this Gold-rated fund routinely yields somewhere in the 5% to 7% range, which puts it well ahead of virtually all stock funds, domestic and international alike.
Learn more about DEM at the WisdomTree provider site.
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