Are you a risk-averse but income-seeking investor? Below are some of the best dividend paying ETFs for you.
Many income-seeking individuals, especially retirees, seek dividend-paying ETFs to generate regular income inflows through dividends. Despite the regular income inflows, holders of dividend-paying ETFs can still hold on for stock prices to appreciate. This is an additional long-term potential income for them.
If you want to weather challenging economic situations by investing in high-dividend ETFs, here are 5 best dividend ETFs to consider for instant diversification and passive income.
But before we get started, let’s take a quick look at what dividend-paying ETFs are.
What Are Dividend paying ETFs?
In a nutshell, dividend-paying ETFs are funds that invest solely in dividend-paying firms and pay dividends to investors regularly, usually monthly, quarterly, semi-annually, or annually.
The best ETF with dividends can help you generate regular passive income while you hold on to benefit from any appreciation in the prices of the underlying stocks for long-term income.
Sometimes, dividend paying ETFs are marketed as “income” or “high-yield” ETFs.
Aside from the regular dividends, a dividend paying ETF also provides instant diversification at a low price, making it a good choice for beginner investors too.
If you seek high-dividend ETFs with the potential for growth over time, consider these five best dividend paying ETFs. If you prefer to grow your investment portfolio instead, reinvesting those dividends back into your ETF is also an option.
5 Best Dividend-paying ETFs To Generate Passive Income
Here are five ETFs that can generate regular dividends to support your income:
Vanguard High Dividend Yield Index ETF (VYM)
If you need a low-cost, high-dividend ETF, Vanguard High Dividend Yield Index ETF (VYM) is no exception. Imagine an ETF that offers a quarterly dividend yield of 3.22% at just 0.06% expense ratio.
VYM comprises about 460 large-cap, high-yield US stocks and is highly diversified across sectors, focusing mainly on firms that pay higher-than-average yields.
What more? VYM has an AUM of $53.8B, which perfectly proves that the fund is performing well. The only downside of this fund is that it focuses more on the financial services sectors.
Pro
- VYM offers low fees (0.06% expense ratio)
- It is highly diversified across sectors
- It has a low fund turnover
- It offers a quarterly dividend yield of 3.22%
Con
- It comprises only of US stocks
- It offers low exposure to mid-cap stocks
- It focuses more on the financial sector stocks
Vanguard International High Dividend Yield ETF (VYMI)
If you need a high-yield dividend-paying ETF with exposure beyond US stocks, Vanguard International High Dividend Yield ETF (VYMI) is for you. VYMI is an “ex-US” fund comprising international stocks with high-dividend yields.
For instance, VYMI has a dividend yield of 5.57%, paid quarterly. This is unsurprising because VYMI focuses only on international firms with an excellent track record of paying dividends.
With this juicy dividend yield, VYMI is worth considering. However, its expense ratio of 0.22% is a bit high for beginners.
VYMI offers high diversification, with its holdings comprising over 1,200 stocks – 20% from firms in emerging markets and 80% from firms in developed markets.
Pro
- VYMI comprises international stocks
- It offers a high quarterly dividend yield of 5.57%
- It comprises more stocks
Con
- It charges a high fee (0.22% expense ratio)
iShares Core Dividend Growth ETF (DGRO)
BlackRock’s iShares Core Dividend Growth ETF (DGRO) is a well-established, low-cost quarterly dividend-paying ETF with an AUM of $29.6B.
DGRO holds over 400 stocks from firms with more than 5 years of consistent and sustainable dividend growth, including stocks from Microsoft and Apple.
DGRO boasts of a low expense ratio of 0.08% and an over-industry-average dividend yield of 2.3%. Though the dividend yield may not be as high as other ETFs, investors who choose to hold DGRO for an extended period will see their dividends grow significantly over time.
Pros
- DGRO offers a low expense ratio
- It has a high diversification.
- It balances between sectors.
Cons
- It offers little exposure to small-cap stocks
- It has a higher turnover rate
- It has no exposure to the international market
WisdomTree US Quality Dividend Growth Fund (DGRW)
To ensure quality performance, WisdomTree US Quality Dividend Growth Fund (DGRW) screens the stock in its holding for quality and sustainable earnings growth. Also, this dividend-paying fund adopts a special weighting method to give more rank to stocks with higher payout rates.
DGRW is a tech-based dividend ETF with about 300 stocks in its holdings, one of the highest for tech-based ETFs.
It is one of the best monthly dividend-paying ETFs, with a monthly dividend yield of 1.55%. However, it has an expense ratio of 0.28%, which is not an issue considering the attractive dividend yield.
Pros
- DGRW offers some exposure to growth stocks to investors
- It screens holdings for quality factors
Cons
- It offers a lower dividend yield of 1.55%
- It offers a higher expense ratio 0.28%
- It has higher fund turnover
Schwab US Dividend Equity ETF (SCHD)
Here is another top dividend ETF with a quarterly dividend yield of 3.9% and an AUM of $54.5B. Although Schwab US Dividend Equity ETF (SCHD) has just 100 stocks in its holdings, these high-quality stocks are from US companies with strong financial ratios and excellent dividend-paying track records.
Despite the attractive dividend yield, this fund has a mere 0.06% expense ratio, which makes it a good choice for those looking for low-cost dividend ETFs to invest in.
Schwab US Dividend Equity ETF is highly diversified with about 90% of its holdings in seven different sectors, which include tech, consumer staples, healthcare, and energy.
Pros
- SCHD offers a high dividend yield
- It screens its holdings for quality performance and sustainable dividends
- It charges a low cost.
Cons
- It offers no exposure to small-cap stocks
- It holds just 100 stocks
- High fund turnover
The Downside of Dividend-paying ETFs
As explained earlier, dividend-paying ETFs are an attractive option for both income-seeking retirees and investors because they offer investment diversification, regular income inflows through dividends, and an additional long-term potential income through stock prices appreciation.
Despite these amazing benefits, dividend-paying ETFs have a major downside: “dividend payments are only sometimes guaranteed” – not always.
While most dividend ETFs hold screened stocks from firms with excellent dividend-paying track records, uncertainties, a sudden decline in performance, unforeseen economic conditions, and other inadvertent factors may affect profit distribution.
As a result, these firms may either lower their dividend yields or, in severe cases, stop paying dividends altogether.
To mitigate this:
- When you are seeking a dividend-paying ETF, do well to research the ETF’s performance over time.
- Consider ETFs with more than 5 years of consistent and sustainable dividend growth.
- Consider ETFs that screen their holdings for quality and sustainable earnings growth.
It wouldn’t be an excellent idea to invest in a high-yield dividend ETF only to lose all your wealth over time due to declining performance.
Conclusion
Now, you have a list of the best dividend paying ETFs at your fingertips.
These dividend ETFs have been a powerful wealth-building tool for risk-averse investors, combining regular dividend payments with rising stock prices.
However, before investing in any dividend ETF, conduct proper research to know the quality and sustainability of its holdings.
The best dividend ETF with the highest dividend yield on our list is Vanguard International High Dividend Yield ETF (VYMI). It offers a significant source of more instant portfolio diversification and passive income of 5.57% dividend yield.
Frequently Asked Questions (FAQs)
Are high-yield dividend-paying ETFs a good investment for passive income?
Most high-yield dividend-paying ETFs are a good way to generate passive income, especially during periods of low interest rates. But you should note that high-yield dividend-paying ETFs are sometimes risky. Therefore, always weigh the dividend yield against other factors like consistency and diversification.
What are the benefits and downsides of dividend ETFs?
Some of the benefits of dividend ETFs include:
Regular income inflows, especially for those seeking passive income.
Exposure to investment diversification
Long-term income from appreciating stock prices
Potential tax efficiencies
However, dividend ETFs, especially high-yield dividend ETFs, sometimes have downsides. Financial challenges, uncertainties, sudden market downturns, declines in performance, unforeseen economic conditions, and other inadvertent factors may lower dividend yields.
Also, some dividend-paying ETFs are not cost-effective, c
What should I look for in dividend-paying ETFs?
What you should look for in a dividend-paying ETF goes beyond dividend yields. You also need to consider the total assets under management (AUM), expense ratio, geographical diversification, underlying holdings, stock quality and dividend sustainability, and the overall reputation of the ETF.
