Best dividend ETFs of 2023
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BLUEPRINT
Updated 3:28 p.m. UTC Nov. 2, 2023
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Finding the best dividend exchange-traded fund (ETF) on the market can help optimize your portfolio’s performance to achieve the best risk-adjusted returns possible. But not all dividend ETFs use the same methodology. Dividend ETFs can be separated into high-dividend yield ETFs and dividend appreciation ETFs.
“While these two types of funds both track indices that focus on dividend-paying stocks, they can have somewhat different risk and return characteristics,” says Molly Concannon, principal and global head of equity product at Vanguard.
High-dividend yield ETFs typically track indexes focusing on stocks with the highest yields.
Dividend appreciation ETFs track indexes that focus on companies that reliably grow their dividends over time. “Such companies are likely to be high-quality firms with strong balance sheets and reliable cash flows,” Concannon says.
To select the best dividend ETFs, we screened multiple high-dividend yield ETFs and dividend appreciation ETFs based on management style, expense ratios, dividend yields, ratings and total assets. ETFs with high turnover rates and annual yields of less than 1.75% didn’t make the cut.
Why trust our investing experts
Experienced fund analysts select our best fund selections based on a screening of several must-have metrics. Some of these metrics include but are not limited to assets under management, expense ratio, strategy, management, minimum investment requirements, turnovers and fees. You can read more about our methodology below.
- 150+ dividend ETFs screened.
- 5-star rating from Morningstar.
- 3 levels of fact checking.
- 3-step editorial review.
Best dividend ETFs
Vanguard High Dividend Yield ETF (VYM)
Schwab U.S. Dividend Equity ETF (SCHD)
WisdomTree U.S. LargeCap Dividend Fund (DLN)
ProShares S&P 500 Dividend Aristocrats ETF (NOBL)
iShares Core Dividend Growth ETF (DGRO)
SPDR S&P Dividend ETF (SDY)
WisdomTree U.S. Quality Dividend Growth Fund (DGRW)
Compare the best dividend ETFs
Methodology
Our curated rankings of the top dividend ETFs was created by screening a list of all available U.S. listed dividend ETFs based on the following “must-have” metrics:
- Morningstar rating. All of the ETFs selected have at least a 5-star rating from Morningstar. This is a quantitative, rearward-looking measure of an ETF’s historical performance.
- Total assets. All the selected ETFs currently have at least $1 billion in assets under management. A higher AUM indicates greater investor confidence and interest in an ETF.
- 12-month dividend yield. All selected ETFs have a trailing 12-month yield of at least 1.75%, greater than the SPDR S&P 500 ETF (SPY). It is important to note that an ETF’s dividend yield can fluctuate, especially as its share price changes.
- Expense ratios. To be considered for this list, a dividend ETF must have a net expense ratio of less than 0.4%. All else being equal, a lower expense ratio means higher net returns for ETF investors.
- Management style. All ETFs on this list are passively managed by tracking a benchmark dividend stock index. None of the ETFs may engage in active stock-picking or utilize derivatives to enhance income or hedge risk.
This criteria allows investors to focus on dividend ETFs that have historically performed well, are currently popular, are managed by established firms with a proven track record, provide a higher yield than the market, are attractively priced relative to peers, and are managed passively with low fees.
An experienced ETF analyst selected the ETFs above, but they may not be right for your portfolio. Before purchasing any of these ETFs, do plenty of research to ensure they align with your financial goals and risk tolerance.
Why other dividend ETFs didn’t make the cut
We excluded actively managed dividend ETFs due to their higher expense ratios and greater complexity. For most investors, sticking to low-cost index ETFs is ideal, given that the majority of actively managed ETFs tend to underperform their passive counterparts.
The rationale for this decision was based on the scorecard results from the S&P Dow Jones Indices (SPIVA). This scorecard measures the performance of actively managed funds worldwide against their index benchmarks. Regarding U.S. listed funds, 93.4% underperformed the S&P 500 as of December 2022, over a trailing 15-year period.
That isn’t to say there is no use case for actively managed dividend ETFs. Some investors may prefer these ETFs for a chance at outperforming the market, generating higher income or hedging risk. However, for most investors, a passively managed dividend ETF tracking an index likely offers the best bang for your buck.
Finally, this list excludes international dividend ETFs. While these ETFs can offer high yields and diversification, they come with higher expense ratios and lower tax efficiency than their U.S.-only counterparts. In addition, most of these ETFs did not achieve a sufficiently high Morningstar rating.
Final verdict
Dividend ETFs can be an excellent core holding in an income-oriented investment portfolio. Compared with picking individual dividend stocks, a dividend ETF offers greater simplicity, accessibility, and diversification.
Investors should focus on their strategies, holdings, and expense ratios when comparing dividend ETFs instead of solely chasing yields. Understanding the difference between U.S. and international holdings, high yields versus dividend growth and equity styles will help you find the right ETF.
Our recommendation for the best overall dividend ETF is the Schwab U.S. Dividend ETF (SCHD), thanks to a combination of high Morningstar rating, rigorous index methodology, low expense ratio, competitive yields and strong historical performance.
What is a dividend ETF?
A dividend ETF is a fund that holds a portfolio of different dividend stocks based on a methodology. Like stocks, dividend ETFs trade on an exchange throughout the day and can be purchased via various brokerage services. Dividend ETFs can be actively or passively managed and hold U.S. or international dividend stocks.
Diving deeper, there are variations in the objectives of dividend ETFs. Some prioritize high yields, seeking to provide investors with a substantial, regular income. These can be particularly appealing in times when interest rates are low. However, a higher yield sometimes flags higher risks, which might indicate that the market believes the dividend is not sustainable.
On the other hand, some ETFs emphasize dividend growth. Rather than going for the immediate high yield, they zero in on companies with a history of steadily increasing their dividends over the years. Such companies often portray greater stability and robust financial health but may not have the highest present yields.
How to invest in dividend ETFs
Investing in dividend ETFs largely mirrors investing in any other ETF. The journey starts with opening a brokerage account. Once you’ve opened and funded your account, you can search for the dividend ETF of your choice by entering its ticker symbol.
When you’re ready to purchase, you specify the number of shares you wish to buy and the type of order – a market order, which buys at the current price, or a limit order, where you set a specific price you’re willing to buy. After confirming all details, you submit the order.
A unique aspect of dividend ETFs is the dividend payment itself. Dividends can be distributed monthly, quarterly, semi-annually or annually, depending on the ETF.
These dividend payments might be taxed at varying rates. It’s important to distinguish between qualified dividends, which can benefit from lower tax rates, and other dividends, which might be taxed at your ordinary income rate.
Some brokerages may offer a feature known as a dividend reinvestment plan (DRIP). A DRIP automatically reinvests your dividends to purchase more shares of the ETF, rather than receiving the dividend as cash. This can be advantageous as it allows your investment to compound, growing over time without the immediate need for you to manually reinvest those dividends.
A DRIP is an efficient way to incrementally increase your holdings and maximize the compounding effect, particularly for investors who prefer to set their investments on a more hands-off approach and minimize brokerage fees.
When considering what to look for in a dividend ETF, investors should go beyond assessing yields and also examine the ETF’s benchmark index, underlying holdings, expense ratio, historical volatility and total assets. Investors should also consider the overall reputation of the ETF’s manager and determine if their investment philosophy aligns with their goals.
There is no “king” of dividend ETFs, per se. To qualify as a dividend king, a stock must have increased its dividends consecutively for at least the past 50 years. Currently, some ETFs may provide exposure to certain dividend king stocks, but no ETF currently holds only dividend king stocks.
Some ETFs focus solely on dividend aristocrats. These are stocks that have paid out and grown dividends for at least 25 consecutive years.
Dividend ETFs come with advantages and drawbacks that investors need to consider. On the upside, these ETFs can offer potential tax efficiencies, especially with qualified dividends. Additionally, by investing in dividend ETFs, one can receive consistent investment income, which can be particularly appealing to those looking for passive income streams. Moreover, these ETFs often provide exposure to a diverse stock style, like dividend growth and quality, allowing investors a broader spectrum of opportunities within one investment vehicle.
On the flip side, dividend ETFs might sometimes underperform compared to a benchmark index, primarily if the focus is solely on high-yielding companies.
Financial challenges can also lead companies to cut their dividends, which directly impacts the returns from dividend ETFs, especially during market downturns. Furthermore, while ETFs are generally lauded for their cost-effectiveness, dividend-focused ETFs can have higher fees than their plain index ETF counterparts, thereby affecting the long-term net returns for investors.
Blueprint is an independent publisher and comparison service, not an investment advisor. The information provided is for educational purposes only and we encourage you to seek personalized advice from qualified professionals regarding specific financial decisions. Past performance is not indicative of future results.
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