Investors seeking income from their portfolios have learned that dividend stocks can be the most powerful investments available to them. Many great companies not only pay generous dividends to their shareholders on a regular basis but also have opportunities to grow their businesses to generate even more cash flow over time. This combination of growth and income can produce powerful total returns for investors over the long haul.
For those who don't like making their own stock picks, dividend exchange-traded funds (ETFs) offer an easy way to get diversified exposure to top dividend-paying stocks. In particular, the following three dividend ETFs take slightly different approaches toward giving their shareholders the mix of dividend stocks they want and the income they need. With many investors seeking the defensive characteristics of dividend stocks, they're particularly timely investments for 2020.
Three top dividend stock ETFs
|
Dividend ETF |
Current Dividend Yield |
Expense Ratio |
|---|---|---|
|
Vanguard High Dividend Yield (VYM +0.32%) |
3.2% |
0.06% |
|
WisdomTree U.S. MidCap Dividend (DON 0.35%) |
2.8% |
0.38% |
|
Vanguard Dividend Appreciation (VIG +0.56%) |
1.8% |
0.06% |
Data sources: Fund providers.
Two dividend ETFs from Vanguard
Vanguard is a giant in the fund industry, and it has two large dividend ETFs that take somewhat different tacks toward investing in the dividend stock arena. Vanguard High Dividend Yield ETF has the higher yield of the two, and it gets that extra income by using the simple methodology of choosing the stocks that have dividend yields that are above what their peers pay. That approach has created a highly diversified portfolio of 400 stocks that are weighted by market capitalization, with higher concentrations in financial, consumer, and healthcare stocks.
Over the past 10 years, the High Dividend Yield ETF has produced an average annual return of 12.9%, keeping up well with the overall market while offering above-average dividend income to its shareholders. With a rock-bottom expense ratio of 0.06% per year, High Dividend Yield lives up to the reputation that the Vanguard Group has developed for low costs.
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Meanwhile, Vanguard Dividend Appreciation takes a different approach. Rather than emphasizing high current yields, the ETF focuses on stocks that have developed a long history of boosting their dividend payouts year after year. That means that investors will find many stocks among the ETF's portfolio of roughly 180 stocks that have relatively low yields, because the index that the fund tracks still values lower-yielding dividend stocks as long as they've committed to raising their payments to shareholders over the long run.
Dividend Appreciation's returns have lagged slightly behind those of the other Vanguard dividend ETF over the past decade, but average annual returns of 12.6% are still respectable. Sharing the same 0.06% expense ratio, Dividend Appreciation is inexpensive, and for those who don't necessarily need as much dividend income now but want more in the future, the ETF is a solid pick.
Looking at smaller dividend stocks
The two Vanguard ETFs above concentrate on large-cap stocks, but the WisdomTree entrant on this list looks at somewhat smaller companies. The U.S. MidCap Dividend ETF has 70% of its assets in companies with market capitalizations between $2 billion and $10 billion, and even the larger companies that you'll find in its portfolio tend to be at the smaller end of the large-cap category. Yet just because the companies are smaller doesn't mean the dividends are -- the WisdomTree ETF has a yield that falls in between the yields of the two Vanguard funds.
WisdomTree uses an unusual weighting system that gives stocks that pay out more money in dividends a higher weight than those paying less in dividends. That helps to boost the yield, and with more than 380 stocks, U.S. MidCap Dividend offers plenty of diversification. A somewhat higher expense ratio of 0.38% per year is one disadvantage of the fund, but average annual returns of 13.3% over the past 10 years show that the strategy can pay off even with higher costs.
Get paid to invest
These dividend ETFs give income investors multiple ways to get more dividend income from their portfolios. Whether you pick one or choose a combination, these ETFs can give you exposure to the dividend stocks with the best chances of producing growth and income for years to come.
