"The 5 Best Dividend ETFs for 2024 | Top Dividend Paying ETF

Interest rates going up have hit bond prices hard, making dividend stocks a popular choice. Dividend ETFs are even better because they offer a diversified portfolio of great dividend stocks without the hassle of buying each one. Forbes Advisor has put together a list of the best dividend ETFs, balancing low-fee, passive funds with actively managed ones that aim to beat the market. We've listed the dividend yield over the past year for each.

1. Vanguard High Dividend Yield ETF (VYM)

• Category: U.S. large-cap value.
• Morningstar rating: 4 stars.
• Total assets: $53.9 billion
• Expense ratio: 0.06%

Advantages:

• There is low fund turnover.
• There are low expense ratios.
• There is high diversification across sectors.

Disadvantages:

• There is no exposure to international stocks.
• There is low exposure to mid-cap stocks.
• Little focus on financial sector stocks.

Vanguard is famous for low-cost, highly diversified ETFs, and VYM is no different. It tracks the FTSE High Dividend Yield Index, including over 450 large-cap U.S. stocks with high yields. VYM is well-diversified across all 10 stock market sectors, although consumer staples and financial services dominate a bit. The fund has a low turnover, which is a plus.

You May Also Like: ETFs vs. Mutual Funds: Which One is Right for You?

2. Schwab U.S. Dividend Equity ETF (SCHD)

Image Source: The Street

• Category: U.S. large-cap value.
• Morningstar rating: 5 stars.
• Total assets: $55.0 billion
• Expense ratio: 0.06%

Advantages:

• Dividends filtered for sustainability.
• Holdings filtered for quality.
• Higher-than-usual yields.

Disadvantages:

• Fewer holdings and higher turnover.
• There is no exposure to small-cap stocks.
• Focus on the financial sector and healthcare stocks.

If you're after a dividend ETF with a quality screener, SCHD is a solid pick. It tracks the Dow Jones U.S. Dividend 100 Index, selecting 100 stocks based on dividend quality sustainability and strong financial ratios. Compared to Vanguard's high-dividend ETF, SCHD has a more concentrated portfolio, which might be appealing for those seeking a higher conviction holding. There's a high concentration in Amgen (AMGN), Cisco (CSCO), and Abbvie (ABBV). SCHD sports a juicy dividend of over 3%, the highest on our list.

3. WisdomTree U.S. Large-Cap Dividend Fund (DLN)

• Category: U.S. large-cap value.
• Morningstar rating: 5 stars.
• Total assets: $4.0 billion
• Expense ratio: 0.28%

Advantages:

• Holdings are based on projected yields.
• Pretty well diversified.
• Good mix of income and growth.

Disadvantages:

• Lower dividend payout.
• Higher costs.
• More frequent buying and selling.

DLN tracks the WisdomTree U.S. Large-Cap Dividend Index, picking about 300 of the largest companies by market cap from the broader WisdomTree U.S. Dividend Index. Unlike some dividend ETFs, DLN weights its holdings based on projected dividends rather than the market cap. This means companies expected to pay higher yields get a higher weighting in the ETF.

4. Pro-Shares S&P 500 Dividend Aristocrats ETF (NOBL)

Image Source: Yahoo Finance

• Category: U.S. large-cap value.
• Morningstar rating: 4 stars.
• Total assets: $11.7 billion
• Expense ratio: 0.35%

Advantages:

• There is a low tracking error.
• More balanced allocation.
• Higher focus on defensive sectors.

Disadvantages:

• There is a lower dividend yield.
• There is a higher expense ratio.
• Focused portfolio of fewer holdings.

ProShares is known for leveraged ETFs but has hidden gems like NOBL. As the name suggests, it focuses on the 67 current dividend aristocrat stocks in the S&P 500, with a balanced allocation. These companies have consistently paid and grown dividends for at least 25 years, helping NOBL reduce volatility and downside risk during market turmoil.

5. iShares Core Dividend Growth ETF (DGRO)

• Category: U.S. large-cap value.
• Morningstar rating: 4 stars.
• Total assets: $27.0 billion
• Expense ratio: 0.08%

Advantages:

• There is a balance between sectors.
• There is good diversification.
• There is a low expense ratio.

Disadvantages:

• There is a higher turnover rate.
• There is little exposure to small-cap stocks.
• There is no exposure to international stocks.

DGRO is BlackRocks flagship dividend ETF in their low-cost core lineup, designed as low-cost portfolio building blocks. It holds over 400 stocks tracked by the Morningstar US Dividend Growth Index, broadly diversified across sectors, and screens for a history of consistently growing dividends. Oil giants like Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) are among the top 10 holdings.

Defining Dividend ETF

Dividend ETFs are funds that hold stocks known for paying dividends. When you own one, fund managers make sure the stocks in the fund are ones that pay good dividends. Like any other ETF, they pick stocks to match a dividend index, giving you a cost-effective way to invest for income. Its simpler than managing your own dividend stock portfolio, but remember, dividend payments aren't guaranteed.

Similar Reads You May Enjoy: The Pros & Cons Of Exchange-Traded Funds (ETFs) Investments

Reasons to Invest in Dividend ETFs

Dividend ETFs come with some perks:

• Tax efficiency: Often more tax-friendly than mutual funds.
• Transparency: Fund holdings are disclosed daily.
• Liquidity: Easy to buy and sell since they're traded on exchanges.
• Low fees: Usually cheaper than mutual funds.
• Diversification: They hold a bunch of stocks, reducing risk.

Who Should Go for Dividend ETFs?

Theyre great for conservative or income-focused investors. If youre after high returns, growth ETFs might be better. Dividend ETFs can also appreciate in value, and they save you the hassle of picking individual stocks. But, they're not risk-freemarket volatility and dividend cuts can affect them.

Dividend ETFs Tax Stuff

Dividends from these ETFs are taxable, even if you reinvest them. Youll get tax forms like a 1099-DIV to show if dividends are qualified (taxed lower) or ordinary (taxed at your regular rate). U.S. companies usually pay qualified dividends, while international ones might not.

Kinds of Dividend ETFs

There are different kinds:

• Dividend Aristocrat ETFs: Focus on stocks with a long history of paying dividends.
• Real Estate Dividend ETFs: Invest in real estate trusts that pay out most of their income.
• International Dividend ETFs: Invest in non-U.S. companies, which can diversify your portfolio but may be taxed higher.
• Diversified Dividend ETFs: Include high-dividend stocks, which might be riskier.

Picking a Dividend ETF

There are over 130 options, so choose wisely. Look at:

• Dividend quality: The reliability of the stocks in the ETF.
• Dividend growth: Whether the dividends are likely to increase over time.
• Dividend yield: The percentage of the purchase price paid in dividends.

High-yield ETFs can be volatile, so balance yield, growth, and quality. Traditional dividend ETFs might not grow as fast as the market, so know the trade-offs.

Conclusion

Dividend ETFs can be a solid part of an income-focused portfolio. They offer simplicity and diversification compared to picking individual stocks. Focus on strategy, holdings, and fees when choosing. Our top pick is the Schwab U.S. Dividend ETF (SCHD) for its strong ratings, low costs, and good performance.

Frequently Asked Questions

What is the meaning of ex-dividend?

The ex-dividend date is the cutoff date to own a stock to get its dividend. If you want those dividends, you need to know this date. It's usually one business day before the company checks who gets the dividends. Buy the stock on or after this date, and you miss out on the payment.

How does taxation happen for dividends?

Dividends fall into two categories: qualified and ordinary. Qualified dividends get the capital gains tax treatment, while ordinary dividends are taxed as regular income. Qualified dividends come from U.S. companies or foreign ones trading on major U.S. exchanges or in countries with a U.S. tax treaty. Ordinary dividends come from foreign companies that don't meet these criteria, or from things like savings accounts, REITs, employee stock benefits, or tax-exempt companies.

What is known as a dividend yield?

Dividend yield helps investors gauge the value of a company's dividend payments. You calculate it by dividing the stocks annual dividend by its current share price, and its shown as a percentage. Its a handy way to compare dividends from different companies. For example, a stock with big quarterly dividends might look good, but if the stock price is high, the yield might not be as impressive.

How do you find out about dividend yield?

To figure out dividend yield, divide the stocks annual dividend by its current share price. For instance, if a stock trades at $10 per share and pays 10 cents per share quarterly, thats 40 cents a year. Divide 40 cents by $10, and you get a 4% dividend yield.

What are the benefits and drawbacks of dividend ETFs?

Dividend ETFs have their perks and drawbacks. On the plus side, they can be tax-efficient, especially with qualified dividends, and they provide steady income, which is great for passive income seekers. They also offer a mix of stocks, giving you a range of opportunities. But, they can sometimes lag behind benchmark indexes, especially if they focus on high-yield stocks. Companies might cut dividends during tough times, affecting returns. Plus, dividend ETFs can have higher fees than plain index ETFs, which can eat into long-term returns.

Does a dividend king ETF exist?

There isn't a specific "king" of dividend ETFs. To be a dividend king, a stock needs to have increased its dividends for at least 50 years straight. Some ETFs include dividend king stocks, but no ETF holds only those stocks. Some ETFs focus on dividend aristocrats, which are stocks that have paid and grown dividends for at least 25 years.

What should one look for in a dividend ETF?

When picking a dividend ETF, don't just look at yields. Check out the ETFs benchmark index, its holdings, expense ratio, historical volatility, and total assets. Also, consider the managers reputation and see if their investment style matches your goals.

This content was created by AI