Investors certainly don’t have any shortage of dividend exchange traded funds (ETFs) to choose from. According to an interesting source I found, there are currently more than 15,000 ETFs in existence, with the majority of these paying some sort of dividend yield (small or large).
The Schwab U.S. Dividend Equity ETF (SCHD) yields 3.8% and tracks the Dow Jones U.S. Dividend 100 Index of high-quality large-cap stocks.
SCHD provides significant exposure to consumer staples, energy and healthcare sectors with an average price-earnings ratio between 15 and 16 times.
The Fidelity High Dividend ETF (FDVV) has delivered over 13% annualized returns since its 2016 inception while yielding 3.1%.
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That’s an incredibly large sample size to work with. Accordingly, many investors looking for top-tier dividend ETFs to park some capital for the long-term in will want to do their research on which of the thousands of options out there fit one’s personal investing profile, risk tolerance levels, and long-term goals.
I’ve picked three top dividend ETFs in this piece that I either own, or would recommend to friends. This isn’t financial advice, and readers should do their homework on each of these stocks before buying. But here’s why I think these top dividend ETFs are at least worth a look right now.
The Schwab U.S. Dividend Equity ETF (SCHD) happens to be one of my largest ETF holdings, and this is one particular purchase I’m intending on holding for decades.
There are a number of reasons for this view. First, SCHD provides a very juicy 3.8% dividend yield, fueled by some of the top dividend stocks in the market. Tracking the Dow Jones U.S. Dividend 100 Index, this ETF focuses on only the highest-quality large-cap dividend stocks in the market. And given the fact that the vast majority of top-tier tech stocks don’t carry dividends (or if they do have yields, they are minuscule), this ETF allows investors who may be otherwise overly exposed to tech stocks to diversify their portfolios further.
With significant weightings to the consumer staples, energy and heath care sectors, I think SCHD can provide much-needed portfolio diversification for those seeking greater yield and value in their overall holdings. And with an average price-earnings ratio between 15 and 16-times, there’s a lot to like about the defensiveness this ETF can provide over long market cycles.
Dividend income is kind of like dessert – the more the better.
In terms of ETFs providing high yield exposure to the market, the Fidelity High Dividend ETF (FDVV) is an option I think is worth considering. With a dividend yield of 3.1% at the time of writing, this fund provides a more traditional mix of large and mid-cap exposure in a range of sectors.
Unlike SCHD, FDVV does have a higher weighting to the tech sector, with most of the major names in this space that pay a dividend included in this fund. That said, the returns FDVV has provided in recent years (more than 13% per year since its inception in 2016) is impressive, and is one of the key reasons why investors looking for broad exposure to dividend paying stocks continue to gravitate toward this name.
With a smart beta tilt (FDVV is aimed at more growth-oriented dividend players) investors in such an ETF don’t have to worry about giving up too much in the way of growth while chasing yield. Thus, for younger investors looking for a top dividend ETF to buy now, this would probably be my pick of the three.
I think one of the most under-appreciated aspects of dividend stocks, at least relative to other fixed income options out there such as bonds, is the ability of companies to consistently raise their dividends over time. By increasing distributions each and every year, investors who lock in a given yield on day one (relative to their cost base) can see much higher yields down the line on their initial investment.
So, unlike other securities that really lock you into a specific yield or return, the upside over a very long period of time for a dividend-paying stock that continues to raise its distributions each and every year for a long period of time, can be meaningful. That goes double for investors who are concerned about inflation eating into their dividend payments over time.
I’ve long thought that dividend growth generally matters more than up-front yield, and VIG is an excellent option for those seeking companies with the balance sheet strength and stability to support future increases over time.
All three ETF options are excellent, and aimed at those with long investing time horizons. For those with the greatest capital needs in retirement, though, the VIG ETF could be among the best options.
You may think retirement is about picking the best stocks or ETFs, but you’d be wrong. Even great investments can be a liability in retirement. It’s a simple difference between accumulating vs distributing, and it makes all the difference.
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