Best Dividend ETFs to Buy Now
So read on as we discuss the best dividend ETFs for a diversified portfolio.
To find the best ETFs to buy, we narrowed our search to seven funds with low costs and varying strategies.
We also selected ETFs that enjoy Morningstar Gold or Silver Medalist ratings. Morningstar's forward-looking ratings system analyzes a fund's ability to outperform its category in the future.
And we focused on the best dividend ETFs that pay more than the S&P 500's current 1.4% yield, with one fund on the list nearly quadrupling this payout.
Data is as of April 22. Yields represent the trailing 12-month yield, which is a standard measure for equity funds.
Exchange-traded fund (ticker) | Dividend yield |
|---|---|
Schwab US Dividend Equity ETF (SCHD) | 3.7% |
SPDR S&P Dividend ETF (SDY) | 2.6% |
Vanguard High Dividend Yield ETF (VYM) | 2.9% |
WisdomTree U.S. Quality Dividend Growth Fund (DGRW) | 1.6% |
FlexShares Quality Dividend Defensive ETF (QDEF) | 1.9% |
Vanguard International Dividend Appreciation ETF (VIGI) | 2.0% |
WisdomTree Emerging Markets High Dividend Fund (DEM) | 5.5% |
- Type: Large-cap blend
- Assets under management: $65.8 billion
- Dividend yield: 3.7%
- Expenses: 0.06%, or $6 annually on a $10,000 investment
Let's start with the Schwab US Dividend Equity ETF (SCHD), a straightforward, well-rounded solution that's ideal for buy-and-hold investors looking for a low-cost ETF.
This index fund follows the Dow Jones U.S. Dividend 100 Index, which tracks 100 high-yielding stocks from the Dow Jones U.S. Broad Market Index that have paid dividends for at least 10 consecutive years.
It has quality filters as well, favoring cash flow to total debt, return on equity, five-year dividend growth and dividend yield.
"Schwab U.S. Dividend Equity ETF stands out for its sensible, transparent, and risk-conscious approach that should generate better long-term risk-adjusted returns than the Russell 1000 Value Index, its Morningstar Category benchmark," says Morningstar analyst Ryan Jackson about the gold-rated fund.
The resultant portfolio is a roughly 100-member group of large-cap dividend stocks. Indeed, the weighted average market capitalization of its holding set is about $135.9 billion.
While it's diversified by sector, some enjoy greater weight than others. Of the 10 sectors where the funds are distributed, seven currently have double-digit exposure, led by energy (21.1%), consumer staples (19.1%) and health care (15.7%).
Importantly, SCHD intentionally excludes real estate investment trusts (REITs) and master limited partnerships (MLPs).
Top holdings include the likes of Coca-Cola (KO), ConocoPhillips (COP) and Verizon Communications (VZ) that help deliver a supple yield of 3.7%. And that's more than double the S&P 500's yield.
Investors can purchase all of the above at one of the lowest expense ratios among dividend ETFs. SCHD's 0.06% expense ratio translates into just $6 per year if you have $10,000 invested in the fund.
- Type: Mid-cap value
- Assets under management: $19.2 billion
- Dividend yield: 2.6%
- Expenses: 0.35%
Let's turn our attention toward dividend growth and look at the SPDR S&P Dividend ETF (SDY).
SDY tracks the S&P High Yield Dividend Aristocrats Index. As you might imagine, this is similar to the S&P 500 Dividend Aristocrats but with a few tweaks.
The S&P 500 Dividend Aristocrats are S&P 500 stocks with 25 or more consecutive years of payout hikes. The S&P High Yield Dividend Aristocrats are pulled from the larger S&P Composite 1500, which includes large-, mid-, and small-cap stocks weighted by yield and with 25 years of consecutive hikes.
While you'd imagine dividend growth stocks would offer high yield, that's often not the case.
In fact, many such funds offer yields comparable to or even less than the market. But SDY's dual focus offers both above-average yield as well as dividend growth, which itself is often a sign of healthy, growing businesses.
"This fund has delivered stellar lifetime results by protecting the downside," says Jackson, who gives SDY a silver Morningstar Medalist rating. "The mature franchises that headline this portfolio tend to generate relatively stable returns."
SDY is somewhat lopsided from a sector perspective. Industrial stocks make up 17.8% of the portfolio, consumer staples 17.6%, utility stocks 17.3% and financial stocks 10.3%. Energy and communication services stocks, meanwhile, account for less than 4% of the portfolio apiece.
At the same time, no individual stock accounts for more than 3.1% of assets at the moment. Top holdings include the likes of Verizon Communications (VZ), Realty Income (O) and Consolidated Edison (ED).
- Type: Large value
- Assets under management: $73.3 billion
- Dividend yield: 2.9%
- Expenses: 0.06%
The Vanguard High Dividend Yield ETF (VYM) is another dirt-cheap dividend ETF that's focused on high yield. It tracks the FTSE High Dividend Yield Index, which is made up of above-average-yielding stocks and, like SCHD, excludes REITs.
VYM offers a much larger selection of stocks than the FTSE High Dividend Yield Index. Its portfolio is made up of roughly 590 dividend payers with a massive median market cap of $142.7 billion.
Financial stocks currently are tops at 20.4% of assets, though health care (14.3%), industrials (13.2%), consumer staples (10.6%) and consumer discretionary stocks (10.2%) all enjoy double-digit weights as well, with energy (9.4%) just outside that group.
Top holdings at the moment are a who's who of blue chip stocks, among them JPMorgan Chase (JPM), Exxon Mobil (XOM), Johnson & Johnson (JNJ) and Procter & Gamble (PG).
The Vanguard High Dividend Yield ETF, which earns a gold Morningstar Medalist rating, might be worthy of more attention if the U.S. economy slows or enters a recession at some point down the road.
Shaky markets tend to send investors into dividend stocks, which can provide income when stock returns aren't there.
- Type: Large blend
- Assets under management: $14.1 billion
- Dividend yield: 1.6%
- Expenses: 0.28%
The WisdomTree U.S. Quality Dividend Growth Fund (DGRW) simultaneously tells you exactly what it invests in and is unintentionally misleading.
Whereas most "dividend growth" funds are interested in the growth of dividends, the WisdomTree U.S. Quality Dividend Growth Fund is interested in dividends – pause – and growth. As in, good old-fashioned earnings growth.
Got it?
Specifically, DGRW starts with a screening universe that includes any companies with a market cap of at least $2 billion within the WisdomTree U.S. Dividend Index. It then chooses the 300 stocks with the best combined rank of growth and quality factors.
Growth is determined by long-term earnings growth estimates, while quality is based on three-year averages for return on equity (RoE) and return on assets (RoA).
DGRW, then, is a predominantly large-cap portfolio. It's also not terribly balanced.
For one, tech is a full 20.1% of assets, followed by double-digit exposure in industrials (15.3%), consumer staples (14.4%), health care (11.2%), financials (10.9%) and consumer discretionary (10.0%). But three sectors have weights of 3% or less.
Also, the top 10 holdings account for 36.5% the portfolio's weight, and the fund is pretty thick in Microsoft (MSFT) at 7.5% and Apple (AAPL) at 4.6%.
The aim with this fund isn't balance, but the stability imparted by dividends and the upside potential provided by above-average growth.
So far, so good. DGRW is arguably one of the top funds you can buy right now, sporting both a Gold Medalist rating and five Morningstar stars.
- Type: Large value
- Assets under management: $383.9 million
- Dividend yield: 1.9%
- Expenses: 0.37%
Generally speaking, most fund managers would tell you they're trying to invest in high-quality stocks. But certain funds take this a step farther, specifically targeting the "quality factor."
With factor investing, an investor targets certain attributes that they expect to produce higher returns. Low volatility is a factor, for instance, as are value and momentum. Quality is another such factor, and it typically revolves around choosing stocks with strong balance sheets, stable earnings and other signs of operational excellence.
Enter the FlexShares Quality Dividend Defensive ETF (QDEF). QDEF tracks the Northern Trust Quality Defensive Index, which aims to create a portfolio that's both high in quality and low on volatility.
The index evaluates all stocks within the Northern Trust 1250 index of large- and mid-cap stocks, then selects dividend payers that score well in management efficiency (e.g., corporate finance activities and corporate governance), profitability and cash flow generation.
Currently, this FlexShares ETF holds 127 dividend stocks that are primarily large in size. However, while it's considered a "large value" fund, just 34.8% of QDEF's portfolio is considered value in nature – the largest chunk, 53.8%, is classified as "core," while the remaining 1.4% is made up of growth stocks.
It's also somewhat imbalanced from a sector perspective. Tech stocks make up about 28% assets, followed by double-digit holdings in health care (12.0%) and financial services (12.0%).
Top holdings for this Gold Medalist fund are a mix of stocks such as Apple, Nvidia (NVDA) and Microsoft that you might not expect to garner top billing in many dividend ETFs, as well as classics such as International Business Machines (IBM) and Johnson & Johnson.
- Type: Foreign large growth
- Assets under management: $7.8 billion
- Dividend yield: 2.0%
- Expenses: 0.10%
The Vanguard International Dividend Appreciation ETF (VIGI) has the same thrust as other dividend growth ETFs — it simply applies its strategy to international stocks.
VIGI tracks the S&P Global Ex-U.S. Dividend Growers Index, a free-float adjusted market cap-weighted index made up of both large- and mid-cap stocks based in developed and emerging markets alike.
The index selects companies that have improved their dividends for at least seven consecutive years. It then removes the highest-yielding stocks, a filter meant to improve portfolio quality and eliminate potential dividend cutters in the future.
Lastly, stocks are capped at 4% weights at each year's rebalancing to avoid dedicating too many assets to any one company.
VIGI's portfolio has roughly 350 holdings, and it tilts heavily toward large-cap stocks, with roughly 88% of assets dedicated to bigger companies. While VIGI can hold emerging market stocks, they currently command a small 8.2% weight.
Instead, the ETF favors developed Europe (44.9%), Pacific (31.3%) and North America (15.6%). Top country allocations at present include Japan (27.7%), Switzerland (16.7%), Canada (15.6%) and the U.K. (8.5%).
While VIGI focuses on dividend growers rather than high yielders, it's still chock-full of international blue chips such as SAP (SAP), Novartis (NVS), Novo Nordisk (NVO) and Nestle (NSRGY).
"Vanguard International Dividend Appreciation effectively captures high-quality firms with consistent dividend growth that should offer attractive long-term performance," says Morningstar director Bryan Armour. "Its established constituents insulate the portfolio from volatility and should lead to a long-term risk-adjusted advantage."
That makes VIGI one of the best dividend ETFs you can buy and one of the top offerings from Vanguard, period.
- Type: Large value
- Assets under management: $2.7 billion
- Dividend yield: 5.5%
- Expenses: 0.63%
Typically, investors look to emerging markets for growth, but the WisdomTree Emerging Markets High Dividend Fund (DEM) taps EMs for high yield.
Really, really high yield.
DEM tracks the WisdomTree Emerging Markets High Dividend Index, a fundamentally weighted index that pulls its selections from the WisdomTree Emerging Markets Dividend Index. Specifically, it takes the highest 30% ranked by dividend yield and then weights them by annual cash dividends paid.
This is a wide portfolio of 475 or so emerging market stocks, primarily large cap (52.6%) in nature, though it has plenty of mid-cap (21.4%) and small-cap stocks (14.1%).
The fund isn't very top-heavy, either. State-owned financial firm China Construction Bank is DEM's biggest holding at 4.5%, and the top 10 holdings only account for 25% of assets.
DEM is, however, geographically lopsided. Chinese stocks make up 25.2% of assets, followed by Taiwan at 17.8% and Brazil at 11.7%. Most of the other countries enjoy only token representation.
While WisdomTree's ETF is a whopper of a high-yield pick, the dividends aren't exactly as consistent as what you'll find here in the U.S. Some of its massive yielders — names such as Petroleo Brasileiro (PBR) and Vale (VALE) — have exceedingly variable dividends.
Even then, this Gold-rated fund routinely yields somewhere in the 5% to 7% range, which puts it well ahead of virtually all stock funds, domestic and international alike.
