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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 high-dividend ETFs allowed not only retirees, but all investors to profit from their holdings without having to put all their eggs in one basket.
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The following is a look at some of the top income-producing ETFs and how you can choose the right one for you.
What are the 5 Best Dividend Funds?
Knowing that the best dividend funds aren’t necessarily the ones with the highest yields, consider the following five income-generating ETFs that offer decent yields while exhibiting healthy fundamentals, such as holdings, expenses, and asset management. AUM) under.
1. SPDR S&P 500 ETF Trust
Formed in 1993, the SPDR S&P 500 ETF Trust (SPY) is the oldest ETF in the United States — and perhaps the most stable. It typically displays the highest assets under management ranking and the most significant trading volume.
The SPY tracks the S&P 500, a benchmark index of the stock market that represents the 500 largest corporations in America.
| statistics | |
|---|---|
| anchor | Spy |
| dividend yield | 1.55% |
| top holdings | Apple Inc., Microsoft Corporation, Amazon, Alphabet Inc. |
| expense ratio | 0.09% |
| AUM | $380.34 billion |
2. ProShares S&P 500 Dividend Aristocrats ETF
The NOBL S&P 500 extracts the cream of the crop from the so-called Dividend Aristocrats, a handful of companies that have increased their dividends every year for at least 25 straight years. Currently there are only 65. Only the world’s most stable, profitable and resilient companies can grow their dividends consistently for a quarter century through changing market conditions – most of these elite have done so for 40 years or more.
| statistics | |
|---|---|
| anchor | Noble |
| dividend yield | 1.89% |
| top holdings | WW Grainger Inc., Chevron Corp., Nucor Corp., Archer-Daniels Midland Co., Exxon Mobil Corp. |
| expense ratio | 0.35% |
| AUM | $11.36 billion |
3. GraniteShares HIPS US High Income ETF
The GraniteShares HIPS US High Income ETF (HIPS) bills itself as “historically one of the highest yielding ETFs in the US market.” With the yield reaching double digits, it’s certainly on the up side — 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.
| statistics | |
|---|---|
| anchor | hip |
| dividend yield | 9.20% |
| top holdings | Blackstone Strategic Credit Fund, Invesco Dynamic Credit Ops, Blackrock Debt Strategies Fund Inc. |
| expense ratio | 2.41% |
| AUM | $65.68 billion |
4. Vanguard High Dividend Yield ETF
VYM provides exposure to domestic dividend stocks from a wide variety of industries by tracking the FTSE High Dividend Yield Index, which is comprised of more than 400 securities. It focuses on the financial, healthcare and consumer staples segments.
| statistics | |
|---|---|
| anchor | VYM |
| dividend yield | 2.95% |
| top holdings | Exxon Mobil Corp., Johnson & Johnson, JPMorgan Chase & Co., Chevron Corp. |
| expense ratio | 0.06% |
| AUM | $50.38 billion |
5. Vanguard FTSE Emerging Markets ETF
This high-dividend ETF focuses on stocks from emerging markets such as China, Brazil, South Africa, and Taiwan. Its yield is impressive and its expense ratio is cheap, but tread lightly. Such emerging market funds have high growth potential but also carry high risk. VWOs are designed for long-term investors who can tolerate a high degree of volatility.
| statistics | |
|---|---|
| anchor | VWO |
| dividend yield | 3.90% |
| top holdings | Taiwan Semiconductor Manufacturing, Tencent Holdings Ltd., Alibaba Group Holding Ltd. |
| expense ratio | 0.08% |
| AUM | $73.18 billion |
Which ETFs Pay the Highest Dividends?
The GlobalX SuperDividend ETF returns an impressive 13.48%, which puts every other leading fund in the market to shame. It exposes investors to the world’s 100 highest-yielding dividend stocks and monthly distributions for the past 11 years.
What are the Safest Dividend Paying ETFs?
Although it seems counterintuitive, the ETF with the highest dividend yield isn’t always the best dividend ETF. Outsized yields often prove volatile over time and can fall with the stock price when market conditions change.
Businesses in trouble sometimes offer surplus dividends to entice new investors, even if it means paying out more than they are bringing in. On the other hand, a low payout ratio that is slow and steady can be an excellent indicator that an organization is healthy and stable.
Are Dividend ETFs a Good Investment?
Dividend investing is attractive because it provides an opportunity to earn profits from stocks without having to sell any shares. Investors flock to exchange-traded funds for the diversity they provide and for their simplicity and ease of use. Dividend ETFs provide the best of both worlds, but they are not a magical wealth-creation machine.
Before choosing an ETF, it’s a good idea to:
- Set financial goals.
- Research dividend funds, the stock market and macroeconomic factors.
- Determine the right asset mix.
- Review all current investments.
Once the strategy is in place, it is time to find the right ETF. Some key aspects to keep in mind include:
- ETF Fees: Understanding the expense ratios of ETFs is important when figuring out which ones provide the best returns.
- Net Yield: This is a solid indicator of the type of income you can expect from your ETF, even though dividends are not guaranteed over time.
- Asset Liquidity: If an ETF has a low availability of assets, selling it when the time comes can be a challenge.
It is important to remember that all types of investments can result in losses. Therefore it is important to evaluate which funds invest in riskier assets and which are safer. Although dividend yield is a great tool for choosing the best dividend-paying stocks, it’s not the be-all and end-all of dividend investing. You should also evaluate the share prices to avoid getting involved with struggling companies.
final take
High-dividend ETFs are an excellent choice for experienced and beginner investors alike, depending on short- and long-term financial goals. They provide shareholders with a passive income stream that can grow over time as the shares appreciate.
Keep in mind that there is no rule that you should choose only one ETF. A mix of funds can further diversify your holdings and allow you to fine-tune your investment strategy to match your goals.
High Dividend ETF FAQs
Are 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.
- Which ETFs Pay Monthly Dividends?
- If you’re looking for consistent income from your investments, the following ETFs pay 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 great way for investors to build wealth over time – unlike other investment types, dividends generate passive income. It is an ideal investment for retired people and others seeking passive income.
- As always, whether an investment is right for you depends on what you want from your investments and your financial goals.
- Are High-Dividend ETFs Taxed?
- High-dividend ETF payments receive the same treatment as income and must be reported on your 1099 statement. Profits from selling ETFs are taxed like the stocks or bonds held in them.
Daniela Rivera-Herrera contributed reporting to this article.
Information is accurate as of February 10, 2023 and is subject to change.
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