It can’t be overstated just how pivotal dividends can be to an investors’ total returns — especially when reinvested. From 1960 through 2021, reinvested dividends accounted for 84% of the total return of the S&P 500, according to Hartford Funds.
In other words, dividends can be powerful. If you’re looking to invest in dividend-paying stocks, look no further than dividend-focused exchange-traded funds (ETFs).
ETFs that prioritize dividends can provide the benefit of having higher dividend yields as well as diversification, one of the key pillars of investing. Here are three first-rate dividend ETFs to check out.
1. Vanguard High Dividend Yield ETF
The Vanguard High Dividend Yield ETF (VYM 0.22%) is a popular option with a fairly broad approach to which stocks it holds. Excluding REITs, the fund consists of 443 public U.S. companies that have paid out above-average dividends in the previous 12 months. With the Vanguard High Dividend Yield ETF, investors will get exposure to large-cap companies spanning all 11 sectors. And since it’s market-cap weighted, larger companies make up the bulk of the fund.
A great thing about this ETF is its low cost with an expense ratio of just 0.06%. A small difference in percentages may not seem like much on paper, but higher expense ratios can eat away at your returns over time. With trailing-12-month payouts of $3.20 per share (or a 3.0% yield as of this writing), it’s also in line with some top-paying dividend ETFs.
2. SPDR S&P Dividend ETF
The SPDR S&P Dividend ETF (SDY -0.08%) is a bit more selective in the stocks it includes, only screening for companies that have consistently increased their dividends at least 20 consecutive years. Although that’s five years less than what it takes to attain the Dividend Aristocrat title, this ETF still consists of many of them, providing a bit more sense of reliability.
The index is weighted by dividend yield, so the higher a company’s yield, the greater its representation in the fund. There are only 119 companies total, but the largest holding, Franklin Resources, only makes up 1.85% of it. The companies within the fund are chosen each January and reweighted every quarter.
The fund paid out $3.35 over the past year (around a 2.7% yield). However, one downside to the SPDR S&P Dividend ETF is its expense ratio, which comes in a bit pricier than other options at 0.35%.
3. iShares Core High Dividend ETF
The iShares Core High Dividend ETF (HDV -0.02%) is the most selective of the three listed here, holding only 75 U.S. stocks that the fund has screened for financial health. This ETF consists mostly of large-cap stocks, and it’s a bit more top-heavy than the other ETFs with the top three holdings — ExxonMobil, Johnson & Johnson, and Chevron — making up over 19% of the fund. The top three sectors — healthcare, energy, and consumer staples — make up about 58% of the fund as well.
With a $3.16 trailing-12-month payout (or a 3.1% yield), it can be a lucrative choice for investors looking to kill two birds with one stone with dividends and large-cap investing. It’s also low cost with a 0.08% expense ratio.
Stefon Walters has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard High Dividend Yield ETF. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.
