Collect Dividends With These 5 ETFs
Dividends = Business profits shared with investors.
Do ETFs (Exchange-traded funds) pay dividends?
If the companies held within an ETF pays dividends, the ETF itself will also pay dividends.
How this works is that the ETF will conveniently collect all the dividend payments from all the companies within the fund and then pay them out regularly, typically every quarter.
You can see how much an ETF pays out in dividends by looking at the "Dividend Yield.” For example, If an ETF trading at $100/share has a 1% Dividend Yield, It will pay out $1 in Dividends annually. ($100 * 1% = $1).
The benefits of dividend ETFs
Instant Diversification
Less Risk
Save Time on Research
Although investing in individual dividend stocks can yield higher dividend payouts, they are also riskier. The benefit of dividend ETFs is that you invest in a basket of dividend stocks. So if a few companies go bankrupt for whatever reason, you won’t notice much of a difference.
In addition to taking on less risk, you won’t have to spend as much time researching individual stocks. Which can save you hours of stress and uncertainty.
You won’t have to worry about questions such as:
“AT&T is imploding! Is it still a good dividend stock?”
“Will the company continue paying its high dividend?”
“Should I buy more of this company despite its weak stock?”
The downside of dividend ETFs
Expense Fees
Lower Dividend Yields
Let’s discuss some downsides when comparing dividend ETFs to individual dividend stocks.
One downside is the fees associated with Dividend ETFs (known as the expense ratio). Most dividend ETFs offer low fees. For example, the high yield dividend fund $VYM has a 0.06% annual fee. This only comes out to around an $0.06 annual fee for every $100 you invest.
The fees are used to pay for expenses involved with running the fund (management, marketing, etc.)
In addition to the fees, many funds have lower dividend yields than many individual dividend stocks. This is because the funds comprise hundreds of different dividend stocks. So the average dividend yield gets diluted by all of the stocks within the fund.
The best dividend ETFs
Here is a list of my 5 favorite dividend ETFs, each with pros and cons.
$VYM (Vanguard High Dividend Yield)
Fund Goal: Seeks to track the performance of the FTSE High Dividend Yield Index.
Fund Dividend Yield: 2.92%
Expense Fee: 0.06%
Top 10 stocks in VYM:
Source: ETF.com
Pros of VYM:
VYM holds 441 companies, concentrating on companies it considers above-average dividend yields. In addition to the 2.92% dividend yield, this fund also offers a decent stock appreciation. Over the past 10 years, VYM has appreciated around 11.46% per year.
Cons of VYM:
Calling itself a “high-yield dividend” fund, it could be more concentrated in higher-yield dividend stocks rather than holding over 400 companies that dilute the overall dividend yield.
$SPYD (S&P 500 High Dividend ETF)
Fund Goal: A low-cost ETF that seeks to provide a high dividend income and the opportunity for capital appreciation.
Fund Dividend Yield: 3.62%
Expense Fee: 0.07%
Top 10 stocks in SPYD:
Source: ETF.com
Pros of SPYD:
This fund is concentrated in the top 80 high dividend-yielding stocks in the S&P 500 and offers a higher dividend yield than most dividend funds. All the companies belong to the S&P 500 and are well-established companies in their respective industries.
Cons of SPYD:
The fund appreciation is below average. The fund has averaged a 7.58% per year return over the past 5 years (compared to the S&P 500 return of 13.65% over that same period).
$VIG (Dividend Appreciation ETF)
Fund Goal: Seeks to track the performance of the S&P U.S. Dividend Growers Index.
Fund Dividend Yield: 1.80%
Expense Fee: 0.06%
Top 10 stocks in VIG:
Source: ETF.com
Pros of VIG:
VIG is made up of 288 companies. They are all large companies, and the fund specifically targets stocks with a record of growing their dividends yearly. The fund has had an average appreciation of around 12% per year over the past 10 years.
I also like how the fund targets companies with better odds of long-term dividend appreciation, which could make for an excellent long-term dividend hold.
Cons of VIG:
The dividend is low when compared to other dividend funds. I’d say that VIG is less risky when compared to other dividend funds but offers less return than a fund like VYM.
$SCHD (U.S. Dividend Equity ETF)
Fund Goal: To track the Dow Jones U.S. Dividend 100 Index.
Fund Dividend Yield: 3.19%
Expense Fee: 0.06%
Top 10 stocks in SCHD:
Source: ETF.com
Pros of SCHD:
SCHD holds the 100 companies in the Dow Jones 100 Index. The Fund can serve as a great diversified dividend portfolio. The Dow Jones adds top-performing companies in different industries. So there is not a lot of overlap between industries in this fund.
It also offers a high dividend and decent stock appreciation as a bonus.
Over the past 10 years, this fund has averaged a return of around 13% per year.
Cons of SCHD:
Although this is probably my favorite dividend-related ETF, It only holds 100 stocks, and they're a particular set of Large US dividend payers. Making this fund a bit riskier.
$VOO (Vanguard S&P 500 Fund)
Fund Goal: To track the S&P 500 Index.
Fund Dividend Yield: 1.43%
Expense Fee: 0.03%
Top 10 stocks in VOO:
Pros of VOO:
Although not considered a traditional dividend ETF, VOO still offers a decent dividend, relatively speaking. The fund holds 500 of the top performing U.S. companies. And provides an excellent track record of stock appreciation.
Over the past 10 years, VOO has averaged a return of 13% per year.
Cons of VOO:
VOO is probably not the best fund to pick if you’re specifically looking for dividends. Other funds (such as SCHD) offer a more optimized version of dividend payouts.
VOO is great for those who care less about dividend payouts and more about fund appreciation.
My final thoughts
If you’re looking to build dividend cash flow to generate income that you plan to spend soon, optimizing for dividends could make sense for you.
But if you’re younger and looking to maximize your annual returns, you’d likely be better off focusing on investing in stocks for price appreciation rather than optimizing for dividend cash flow. Especially since the best long-term returns come from reinvesting your dividends anyways.
Stock appreciation, in general, has historically outperformed dividend payouts. Many companies now offer "stock buybacks" instead of providing dividends to reward investors for holding their stock. In many ways, a stock buyback is similar to a dividend because the company is essentially distributing money to investors in a more tax-friendly way.
So I personally wouldn’t specifically chase dividend yields alone.
If the stocks/funds you own offer dividends, cool. If not, I wouldn’t stress too much about it.
I would rather the companies I invest in use their profits to create more value for the overall business.
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As Always: Buy things that pay you to own them.
-Josh
Blog Post: #035
