Retirees have long flocked to dividend stocks because they generate income without requiring investors to sell any shares — but betting on individual stocks is risky business. The advent of the high-dividend ETF allowed not just retirees, but all investors to profit from their holdings without putting all their eggs in one basket.
The following is a look at some of the top income-producing ETFs and how you can choose the one that’s right for you.
What Are the 5 Best Dividend Funds?
Knowing that the best dividend funds aren’t necessarily those with the highest yields, consider the following five income-generating ETFs, which pay good yields while also displaying healthy fundamentals, like holdings, expenses and assets under management (AUM).
1. SPDR S&P 500 ETF Trust
Formed in 1993, SPDR S&P 500 ETF Trust (SPY) is the oldest ETF in the United States — and perhaps the most stable. It generally displays the highest asset under management rankings and the most significant trading volume.
SPY tracks the S&P 500, the stock market’s benchmark index that represents 500 of the largest corporations in America.
|Top Holdings||Apple Inc., Microsoft Corporation, Amazon, Alphabet Inc.|
2. ProShares S&P 500 Dividend Aristocrats ETF
NOBL plucks the cream of the crop from the S&P 500 — the so-called Dividend Aristocrats, a handful of companies that have raised their dividends every year for at least 25 years straight. There are currently only 65. Only the world’s most stable, profitable and resilient companies can consistently grow their dividends for a quarter century through changing market conditions — most of these aristocrats have done it for 40 years or more.
|Top Holdings||W.W. Grainger Inc., Chevron Corp., Nucor Corp., Archer-Daniels Midland Co., Exxon Mobil Corp.|
3. GraniteShares HIPS US High Income ETF
GraniteShares HIPS US High Income ETF (HIPS) bills itself as “historically one of the highest yielding ETFs in the U.S. market.” With a yield approaching double-digits, it’s certainly up there — but the tradeoff is a painfully high expense ratio. It provides exposure to four alternative high-income categories: BDCs, MLPs, closed-end funds and REITs.
|Top Holdings||Blackstone Strategic Credit Fund, Invesco Dynamic Credit Opps, Blackrock Debt Strategies Fund Inc.|
4. Vanguard High Dividend Yield ETF
VYM offers exposure to domestic dividend stocks from a variety of industries by tracking the FTSE High Dividend Yield Index, which includes more than 400 securities. It emphasizes the financial, healthcare and consumer staples segments.
|Top Holdings||Exxon Mobil Corp., Johnson & Johnson, JPMorgan Chase & Co., Chevron Corp.|
5. Vanguard FTSE Emerging Markets ETF
This high-dividend ETF focuses on stocks from emerging markets like China, Brazil, South Africa and Taiwan. Its yield is impressive and its expense ratio is dirt cheap, but tread lightly. Emerging market funds like this one have high growth potential but also high risk. VWO is designed for long-term investors who can tolerate a greater level of volatility.
|Top Holdings||Taiwan Semiconductor Manufacturing, Tencent Holdings Ltd., Alibaba Group Holding Ltd.|
Which ETF Pays the Highest Dividend?
GlobalX SuperDividend ETF pays an impressive 13.48% yield, which puts just about every other major fund on the market to shame. It exposes investors to 100 of the world’s highest-yielding dividend stocks and has made monthly distributions for the last 11 years.
What Are the Safest Dividend Paying ETFs?
Although it seems counterintuitive, the ETF with the highest dividend yield is not always the best dividend ETF. Outsized yields often prove unsustainable over time and can fall with the price of the stock when market conditions change.
Businesses in distress sometimes offer supersized dividends to lure fresh investors, even if it means paying out more than they’re bringing in. On the other hand, a lower payout ratio that’s slow and steady can be an excellent indicator that an organization is healthy and stable.
Is a Dividend ETF a Good Investment?
Dividend investing is attractive because it offers the chance to harvest profits from stocks without selling any shares. Investors flock to exchange-traded funds for the diversity they provide and their simplicity and ease of use. Dividend ETFs offer the best of both worlds, but they are not a magic wealth-generation machine.
Before you choose an ETF, it’s a good idea to:
- Set financial goals.
- Research dividend funds, stock markets and macroeconomic factors.
- Determine the right asset mix.
- Review all current investments.
Once strategy prep is done, it’s time to look for the right ETF. Some of the main aspects to keep in mind include:
- ETF Fees: Understanding the expense ratio of an ETF is crucial when figuring out which yield the best returns.
- Overall Yield: This is a solid indicator of the type of income you can expect from your ETFs, even when dividends aren’t guaranteed over time.
- Asset Liquidity: If an ETF has less asset availability, it could become a challenge to sell it when the time comes.
It’s important to remember that all investment types could lead to losses. That’s why it’s vital to evaluate which funds invest in riskier assets and which stay on the safer side. Although dividend yield is a great tool to pick the best dividend-paying stocks, it’s not all there is to dividend investing. You should also evaluate share prices to avoid getting involved with struggling companies.
High-dividend ETFs are an excellent choice for veteran and beginner investors alike, depending on short- and long-term financial goals. They offer shareholders a passive income stream that can increase over time as shares appreciate.
Keep in mind that there’s no rule saying you must choose only one ETF. A blend of funds can further diversify your holdings and let you fine-tune your investing strategy to match your goals.
High Dividend ETF FAQsAre you considering a high-dividend ETF investment but still want to learn more? Here are some of the most commonly asked questions about high-dividend ETFs.
- What ETFs pay a monthly dividend?
- If you're looking for a consistent income from your investments, the following ETFs do payouts on a monthly schedule: SPDR S&P 500 ETF Trust, ProShares S&P 500 Dividend Aristocrats ETF, GraniteShares HIPS US High Income ETF, Vanguard High Dividend Yield ETF and Vanguard FTSE Emerging Markets ETF, among others.
- Are high-dividend ETFs worth it?
- Dividends can be a good way for investors to build wealth over time – unlike other investment types, dividends generate passive income. This is a perfect investment for retirees and others looking to receive passive income.
- As always, whether an investment is right for you depends on what you want from your investments and what your financial goals are.
- Are high-dividend ETFs taxed?
- High-dividend ETF payments receive a similar treatment to income and must be reported on your 1099 statement. Profits from selling ETFs are taxed like the underlying stocks or bonds inside them.
Daniela Rivera-Herrera contributed to the reporting for this article.
Information is accurate as of Feb. 10, 2023, and is subject to change.