7 Best Dividend ETFs
Dividend investing is a great way to earn cash flow and price appreciation, but evaluating and managing a diversified portfolio of dividend stocks can be a big job. Thankfully, many dividend exchange-traded funds (ETFs) can provide you with hassle-free income options.
The best dividend ETFs come from reputable fund families, offering sustainable cash flow from a well-diversified selection of large-cap and mid-cap stocks. Whatever your preferred investing strategy—value, international, real estate or fixed income—there are dividend funds tailored to your needs.
We’ve screened a very broad selection of the best dividend ETFs to uncover reasonably priced options that offer higher-than-average yields, low expense ratios and decent five-year trailing returns. An added feature in our evaluation is that every fund is in the top 80% of its respective category.
The Best Dividend ETFs of August 2022
| Dividend ETF Name (ticker) | TTM Dividend Yield |
|---|---|
| JPMorgan Diversified Return International Equity ETF (JPIN) | 6.53% |
| Vanguard Short-Term Inflation-Protected Securities ETF (VTIP) | 5.59% |
| iShares International Developed Property ETF (WPS) | 5.00% |
| SPDR S&P Global Dividend ETF (WDIV) | 5.19% |
| Invesco S&P 500 High Dividend Low Volatility ETF (SPHD) | 3.68% |
| iShares Core High Dividend ETF (HDV) | 3.14% |
| Vanguard Dividend Appreciation ETF (VIG) | 1.99% |
JPMorgan Diversified Return International Equity ETF (JPIN)
12-Month Yield
6.53%
5-Year Average Annualized Return
0.63%
Expense Ratio
0.37%
Vanguard Short-Term Inflation-Protected Securities ETF (VTIP)
12-Month Yield
5.59%
5-Year Average Annualized Return
2.9%
Expense Ratio
0.04%
iShares International Developed Property ETF (WPS)
12-Month Yield
5.00%
5-Year Average Annualized Return
-0.3%
Expense Ratio
0.48%
SPDR S&P Global Dividend ETF (WDIV)
12-Month Yield
5.19%
5-Year Average Annualized Return
3.2%
Expense Ratio
0.4%
Invesco S&P 500 High Dividend Low Volatility ETF (SPHD)
12-Month Yield
3.68%
5-Year Average Annualized Return
6.4%
Expense Ratio
0.3%
iShares Core High Dividend ETF (HDV)
12-Month Yield
3.14%
5-Year Average Annualized Return
7.9%
Expense Ratio
0.08%
Vanguard Dividend Appreciation ETF (VIG)
12-Month Yield
1.99%
5-Year Average Annualized Return
11.5%
Expense Ratio
0.06%
*All data is sourced from Morningstar, current as of July 12, 2022.
Methodology
We screened the entire universe of dividend ETFs using four factors:
- Low expense ratios.
- High distribution yield.
- Good five-year trailing returns.
- Top 20% category rank.
From the resulting list of the most attractive dividend ETFs, we selected a diverse mix of stock, bond and real estate funds that garnered neutral to high Morningstar ratings. Finally, we polished the list by choosing well-regarded fund families with reasonable investment strategies.
What Is a Dividend ETF?
Dividend ETFs are exchange-traded funds that hold stocks with a strong history of paying dividends to their shareholders. When you own a dividend ETF, fund managers ensure the holdings are always ones that pay out good dividends.
Like any other exchange-traded fund, the managers of a dividend ETF choose a portfolio of stocks to match the composition of a dividend index. The resulting portfolio provides the holders with an inexpensive income-generating investment asset.
Dividend ETFs can be a more convenient way to pursue income investing than owning and managing your own basket of individual dividend stocks. Unlike the coupon payments on bonds, dividend payments are never guaranteed—that makes maintaining a portfolio of dividend stocks more labor intensive for individual investors.
How To Choose a Dividend ETF
Morningstar lists more than 130 dividend ETFs, making it imperative that you understand how to choose the right one for your portfolio. For example, two dividend funds might have a similar yield. But you might prefer the ETF, where dividends have historically grown at a faster rate.
When choosing a dividend ETF, you’ll want to be aware of:
- Dividend yield. This is the percentage of the purchase price paid in dividends during the prior 12 months. If a $100 ETF pays $10 in dividends, it has a 10% dividend yield.
- Dividend growth. Just because a company pays a dividend now doesn’t mean it will continue in the future. Even if it keeps its dividend, there are no guarantee payouts will rise over time. That’s why some investors prefer buying into so-called dividend aristocrats. Companies in the S&P 500 have long histories of raising their dividends over time.
- Dividend quality. This applies to the quality and creditworthiness of the stocks owned by the ETF. If the fund owns riskier companies with lower credit ratings, then it’s more likely that the value of the fund will decline, taking your total return with it. As a general rule of thumb. avoid funds using riskier companies to boost yields.
The highest-yielding dividend ETFs may feature more volatile yields over time and less certainty of maintaining those yields. It’s not uncommon for the highest-yielding stocks to suffer greatly during market declines. That is why it’s important to consider current yield, dividend growth and quality.
Traditional dividend ETFs own companies that don’t grow as fast as the overall market. For this reason, investors need to understand the trade-off they might be making when seeking yield versus appreciation through rising stock prices.
If your goal is simply to earn the most with your money, you might opt for stocks positioned to grow in value more and then sell off shares as you need to for income.
Types of Dividend ETFs
There are many categories of dividend ETFs, spanning index funds, regions and quality dividend stocks like the dividend aristocrats. Others focus on stock market sectors known for offering high yields, like REITs, utilities or on preferred stocks.
Below, we highlight some examples of leading dividend ETFs for each major category. Keep in mind that these are not endorsements of any particular fund. They’re just meant to highlight the types of funds you might research as you seek out the best dividend ETF for you.
- Diversified Dividend ETFs. High-dividend ETFs include companies that make higher than average dividend payments. Typically, companies that pay higher dividends might have greater risk profiles and may be subject to more price volatility.
- International Dividend ETFs. International dividend ETFs work much like their domestic high dividend counterparts; they simply invest in international companies instead of those based in the U.S. This kind of international exposure can further diversify your portfolio. Their dividend payments may be taxed at a higher rate than U.S. companies. Check with a tax professional if you intend to rely heavily on international dividend ETFs.
- Real Estate Dividend ETFs. Real estate investment trusts own shares of companies that buy or loan money to income-producing real estate. By law, REITs must pay 90% of their income to shareholders, making them top choices for those seeking rich dividend payouts.
- Dividend Aristocrat ETFs. Dividend aristocrats are the gold standard of dividend-paying stocks, making them a go-to for people looking for consistent, steady dividend income.
Dividends ETFs and Taxes
Dividend ETFs are taxed similarly to the underlying securities within the fund. Even if you reinvest dividends, they still count as taxable income.
Most investors will receive tax forms, like a 1099-DIV, that explain whether their dividends are qualified or ordinary.
Qualified dividends are taxed at lower rates than ordinary income, such as long-term capital gains. Qualified dividends tend to come from U.S.-based companies.
Ordinary dividends, meanwhile, are taxed at your ordinary income rates; international companies are more likely to pay ordinary dividends.
Who Should Invest in Dividend ETFs?
Dividend ETFs may appeal to certain types of investors, like those who are more conservative with their investing dollars or more interested in cash flow for retirement. Aggressive investors looking to maximize their total returns may be better served by smaller, growth stock funds that provide the potential for higher capital gains.