Investing for income can be a great way to maximize the total return of an investment portfolio. Dividend investments offer investors a payout on their stock investments that are determined by management. Dividend payouts can be regularly scheduled or special dividends. Regardless, the promise of cash along with an appreciating stock return can have an even greater appeal than lower-risk fixed income investing options.
Investors looking in the equity dividend portion of the market will find several choices that can be somewhat overwhelming. For this reason, exchange-traded funds (ETFs) in the dividend category are popular. ETFs provide the advantage of diversification along with professional management in some cases. Most ETFs are passive funds that track an index, but the index offerings in the market are becoming more customized to help investors find exactly what they are looking for. In dividend ETFs, investors enjoy regular dividend payments passed through from the fund.
- One of the best ways to get the most out of your returns is through investing for income.
- Equity dividends can come from REITs, MLPs, blue-chip dividends, and many others.
- High dividend ETFs often have high dividend yields.
Investing in Equity Dividend ETFs
Overall, equity dividends can come from real estate investment trusts (REITs), master limited partnerships (MLPs), blue-chip dividends, dividend growth investments, and more. Across these categories, ETFs have been created to help simplify the dividend investing process.
Below is a list of the top dividend ETFs in several of the most popular equity dividend categories that investors might be interested in when looking for equity dividend income. Funds were chosen primarily based on one-year return, dividend yield, U.S. investment holdings, and assets under management as of April 2019 as provided by ETFDB.com. Selections do not include leveraged ETFs.
- Real Estate Investment Trusts (REITs): The iShares Residential Real Estate ETF (REZ) has a one-year total return of 27.31%. Its dividend yield is 3.15%. The ETF includes stocks and REITs across the U.S. residential real estate sector. It is a passive fund that tracks the FTSE NAREIT All Residential Capped Index.
- Master Limited Partnerships (MLPs): The Global X MLP & Energy Infrastructure ETF (MLPX) has a one-year return of 12.72%. Its dividend yield is 4.95%. The ETF includes MLPs from the energy sector with top holdings in TransCanada, Kinder Morgan, Enbridge, Williams Companies, and Oneok.
- Blue Chip Dividends: Blue-chip dividend stocks encompass most of the dividend value category. As such, the S&P 100, Dow Jones, and S&P 500 can be good universes for blue-chip, dividend value. SPYD tops this list with a portfolio of the highest dividend-paying stocks in the S&P 500. SPYD has a one-year total return of 12.88%. Its dividend yield is 4.25%.
- Dividend Growth: The VictoryShares Dividend Accelerator ETF (VSDA) tops the dividend growth category. The fund has a one-year total return of 18.91%. Its dividend yield is 1.55%.
- Dividend Aristocrats: Dividend aristocrats are popular for dividend investors because they are known for increasing their dividend payout consecutively each year for 25 years. The ProShares S&P 500 Dividend Aristocrats (NOBL) is an ETF made up of all of the U.S. market’s dividend aristocrats, tracking the S&P 500 Dividend Aristocrats Index. The fund has a one-year total return of 14.21%. Its dividend yield is 2.12%.
- Smart Beta: Newly introduced AAM S&P 500 High Dividend Value ETF (SPDV) is one of the best smart beta ETFs focused on screening for dividend characteristics. SPDV tracks the S&P 500 Dividend & Free Cash Flow Yield Index which filters companies in the S&P 500 by dividend and free cash flow. AAM also offers the AAM S&P Developed Markets High Dividend Value ETF (DMDV) and the AAM S&P Emerging Markets High Dividend Value ETF (EEMD).
- Sector Specific: Looking for dividends from specific sectors is also often a viable strategy for dividend investing. Across the market, there are hundreds of sector ETFs and a few that will provide for sector and dividend benefits. In this category, the First Trust NASDAQ Technology Dividend ETF (TDIV) is a top choice. The fund has a one-year total return of 18.93%. Its dividend yield is 2.46%. Moreover, in the sector-specific dividend category, international market dividend ETFs can also be a good geographic, segment-specific investment.
- Preferred Stocks: Preferred stocks are known for offering higher dividends than their common stock counterparts. They are also higher up on the seniority list which promises greater payout in the case of insolvency. The Invesco Preferred ETF (PGX) has a one-year total return of 7.14% and a dividend yield of 5.64%.
- Monthly Dividends: Monthly dividends can be great investments for serious income investors looking to investment income as a supplement on a more frequent basis. The Invesco S&P 500 High Dividend Low Volatility ETF (SPHD) offers a monthly dividend with an annual dividend yield of 3.93%. Its one-year total return is 12.96%.
- Highest Yield: Across the dividend equity ETF market, the highest annual yield for ETFs falls in the 5% to 6% range. The Legg Mason International Low Volatility High Dividend ETF (LVHI) tops this category with a one-year dividend yield of 5.31% and a one-year total return of 9.42%.
Other Special Considerations
When investing for dividend income through ETFs there can be a few other important questions to consider.
What is a high dividend ETF? A high dividend ETF is a portfolio of investment holdings that have a high dividend yield. The ETF chooses its own dividend based on the dividends collected from all of its holdings. High dividend equity ETFs can reach dividend yields of as high as 5% to 6%. Investors looking for income may also like other income ETFs such as those focused in many of the popular high income, credit market categories.
What are the tax considerations? ETFs offer some tax advantages on their own, specifically, they do not typically generate capital gains which are passed through for taxation to investors annually. In some cases, dividend ETF investing may offer the advantage of qualified dividends which are taxed at a lower rate or not at all for low-income earners.
Why is total return important for dividend investing? When investing for dividend income it is usually best to look at total return along with dividend yield. A company or an ETF may have a high dividend yield but no capital appreciation. This is primarily the difference between credit income and equity market income investing.
Where can I buy dividend ETFs? Generally, investors look to buy dividend ETFs through three channels: advisors, full-service brokers, and discount brokerage platforms.
What are the fees associated with dividend ETFs? Dividend ETFs will usually have lower fees than mutual funds. The majority of ETFs track an index that allows for lower fees since trading and management costs are lower. ETF expense ratios are also usually lower than mutual funds because they don’t integrate 12b1 fees which are a part of the mutual fund fee structure.