Dividends have long been a favorite of investment gurus from Warren Buffett to late Vanguard Group founder John Bogle, and it’s easy to see why. Who wouldn’t want to generate a steady income stream from their stock portfolio?
Individual stocks can provide income, but dividend ETFs are an easy way to gain exposure to a basket of dividend-paying stocks. We present below five of the most popular dividend ETFs to invest in this year, ranked by order of assets.
A dividend stock refers to a company that distributes some of its earnings to shareholders — usually in cash or stock. The company’s board of directors figure out what percentage of earnings to pay out to shareholders, while the rest goes back into the company.
Most companies offer quarterly dividends. With a stock dividend, a company distributes additional shares instead of cash. (Read this column for details about how to search for the best dividend growth stocks now.)
What is an ETF and how do ETFs work? An exchange traded fund is a basket of stocks. That’s similar to a mutual fund, but an ETF trades like an individual stock. An ETF can provide exposure to the broad market, an industry sector or other subsegment, generally with less risk than owning individual stocks.
For instance, if you own only shares of Company A, you are fully exposed if the stock drops. But with an ETF, you might own Company A along with many other stocks in the same industry, lessening the risk of each component.
Dividend ETFs combine the two investment choices. The funds own a basket of dividend-paying stocks.
Choices abound. About 70 U.S.-listed ETFs contain “dividend” in their name, according to Morningstar Direct.
You can further slice and dice within the dividend ETFs universe, based on everything from market cap to dividend growers to emerging markets.
Here are four questions to ask yourself when considering dividend ETFs to buy.
What is the Dividend ETF’s Objective?
Not all dividend ETFs are created equal. Some funds target companies that have increased their payouts annually for a minimum number of years. Others may focus on companies paying the highest yields.
The name of the dividend ETF will usually indicate its objective. But it’s always a good idea to check a fund’s objective and strategy, whether online or in its prospectus. That way, you can make sure the dividend ETF is aligned with your goals.
How Have the Dividend ETFs Performed?
Just as you check a stock’s earnings history or a mutual fund’s performance track record, find out what kinds of returns the ETF is generating. You should be able to access the data at the ETF issuer’s website or a fund tracker such as Morningstar Inc.
Be sure to look at the year-to-date performance, as well as three-year and five-year average annual returns for the dividend ETFs you’re considering.
What is the Dividend ETF’s Annualized Yield?
You can see a dividend ETF’s annual payout on its prospectus or its website. To calculate the dividend yield yourself, divide the most recent dividend payment by the net asset value, or share price of the fund.
To figure out if it’s bigger than average, compare the fund’s yield to that of the S&P 500, an oft-used benchmark for an average dividend payout.
How Much Does the Dividend ETF Cost?
To find out how much it costs to buy a dividend ETF, look for its expense ratio online or in the fund’s prospectus. The expense ratio, which includes the ETF’s operational costs, is a percentage of the fund’s average net assets.
In general, passive index funds have the lowest expense ratios, while actively managed ETFs tend to cost more. The expense ratio is calculated annually.
Five Dividend ETFs To Consider In 2020
Ranked by assets, as of Oct. 23 (S&P 500 yield as of Oct. 26: 1.73%):
1. Vanguard Total Stock Market ETF (VTI), $172.3 billion in assets, 1.6% annualized yield.
2. Vanguard Dividend Appreciation ETF (VIG), $49.1 billion, 1.7%.
3. Vanguard High Dividend Yield ETF (VYM), $27.5 billion, 3.4%.
4. SPDR S&P Dividend ETF (SDY), $15.6 billion, 2.9%.
5. iShares Select Dividend ETF (DVY), $13 billion, 4.1%.
Follow Nancy Gondo on Twitter at @IBD_NGondo
YOU MAY ALSO LIKE: