Investors certainly have no shortage of dividend exchange-traded funds (ETFs) to choose from. According to one interesting source I found, there are currently over 15,000 ETFs, and most of them pay some type of dividend yield (small or large).
The Schwab US Dividend Equity ETF (SCHD) has a 3.8% yield and tracks the Dow Jones US Dividend 100 index of high-quality large-cap stocks.
SCHD offers significant exposure to the consumer staples, energy and healthcare sectors with an average price-earnings ratio of between 15 and 16 times.
The Fidelity High Dividend ETF (FDVV) has generated annualized returns of over 13% since its inception in 2016, with a return of 3.1%.
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That’s an incredibly large sample size to work with. Consequently, many investors looking for top-tier dividend ETFs to park some long-term capital will want to investigate which of the thousands of options out there fit their personal investment profile, risk tolerance levels, and long-term goals.
In this article, I selected three top dividend ETFs that I own or would recommend to friends. This is not financial advice and readers should do their homework on each of these stocks before purchasing them. But here’s why I think these top dividend ETFs are at least worth a look right now.
He Schwab US Dividend Stock ETF (SCHD) happens to be one of my largest ETF holdings, and this is one particular purchase that I intend to hold for decades.
There are several reasons for this opinion. Firstly, SCHD offers a very juicy dividend yield of 3.8%, boosted by some of the highest dividend stocks on the market. Tracking the Dow Jones US Dividend 100 Index, this ETF focuses solely on the highest quality large-cap dividend stocks on the market. And given the fact that the vast majority of top-tier tech stocks don’t generate dividends (or if they do have yields, they’re minuscule), this ETF allows investors who would otherwise be overly exposed to tech stocks to further diversify their portfolios.
With significant weightings in the consumer staples, energy and healthcare sectors, I believe SCHD can provide much-needed portfolio diversification for those seeking greater yield and value in their overall holdings. And with an average price-to-earnings ratio of 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 like dessert: the more, the better.
In terms of ETFs that offer high-yield exposure to the market, the High Dividend Fidelity ETF (FDVV) is an option that I think is worth considering. With a dividend yield of 3.1% at the time of writing, this fund offers a more traditional mix of large- and mid-cap exposure across a variety of sectors.
Unlike SCHD, FDVV has a heavier weighting in the technology sector, and most of the big dividend-paying names in this space are included in this fund. That said, the returns that FDVV has provided over the past few years (over 13% annually since its inception in 2016) are impressive and is one of the key reasons why investors looking for broad exposure to dividend-paying stocks continue to gravitate towards 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 growth while chasing yield. So, for younger investors looking for a high-end dividend ETF to buy now, this would probably be my pick of the three.
I think one of the most underrated aspects of dividend stocks, at least relative to other fixed income options out there, like bonds, is the ability of companies to consistently grow their dividends over time. By increasing distributions each year, investors who lock in a certain return from day one (relative to their cost base) can earn much higher returns later on their initial investment.
So, unlike other securities that actually lock you in at a specific yield or return, the upside over a very long period of time for a dividend-paying stock that continues to grow its distributions every year for a long period of time can be significant. This goes double for investors who are worried about inflation affecting their dividend payments over time.
I’ve long thought that dividend growth generally matters more than initial yield, and VIG is a great option for those looking for companies with balance sheet strength and stability to support future increases over time.
All three ETF options are excellent and are aimed at those with long investment time horizons. However, for those with greater capital needs in retirement, the VIG ETF could be among the best options.
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