Although 2019 produced significant gains for stocks, some investors still worry about market volatility after losses in 2018. Dividend funds tend to perform better than growth stock funds during periods of stock market instability. Dividend funds also generally offer higher yields than typical S&P 500 stocks. Dividend growth and high dividend yield can be very effective investing strategies. Below, we list some of the best exchange-traded funds (ETFs) and mutual funds for investors focused on dividends.
Vanguard Dividend Appreciation ETF
The Vanguard Dividend Appreciation ETF (VIG) tracks an index of companies that have raised their dividends each of the last ten years. As of Nov. 30, 2019, the fund had the highest percentage of its $50.5 billion of assets invested in Microsoft, Procter & Gamble, Visa, and Walmart. This ETF had an SEC yield of 1.78% and an expense ratio of 0.06%.
Schwab U.S. Dividend Equity ETF
The Schwab U.S. Dividend Equity ETF (SCHD) tracks the Dow Jones U.S. Dividend 100 Index. These high-dividend-yielding stocks have also consistently paid dividends over the years. The fund had about 11.8 billion in assets as of January 2020, and the expense ratio was just 0.06%. The fund's largest holdings were Bristol Myers, Home Depot, Intel, and Coca-Cola.
Vanguard High Dividend Yield ETF
The Vanguard High Dividend Yield ETF (VYM) focuses on stocks currently offering high dividend yields. Smaller companies that pay significantly higher dividends often offer those dividends to compensate investors for higher risk. However, the Vanguard High Dividend Yield ETF places greater weight on companies with a higher market capitalization. As a result, the fund’s most significant holdings in early 2020 were JPMorgan Chase, Johnson & Johnson, Procter & Gamble, Exxon, and AT&T. The overall effect is similar to the Dogs of the Dow strategy. In actual practice, the fund has not been significantly more risky than the stock market as a whole. It has continued to deliver higher dividends, with an SEC yield of 3.19% as of December 2019. Like the Vanguard Dividend Appreciation ETF, the expense ratio was just 0.06%
Vanguard Dividend Growth Fund
The Vanguard Dividend Growth Fund (VDIGX) is managed by Don Kilbride of Wellington Investment Management. In over 13 years as the fund's manager, Kilbride has been very adept at finding reasonably priced companies that he expects to grow their dividends by the rate of inflation plus 3%. This strategy has produced steady performance, even during the roughest markets. In the last several years, the fund has grown its assets from $25 billion to $42 billion. The fund focuses on large-cap stocks, with a portfolio topped by Medtronic, Coca-Cola, and McDonald's. As of Dec. 31, 2019, the fund’s SEC yield was 1.79%. Over the last ten years, the fund returned an impressive 13.09%. That is higher than the benchmark index, which returned only 12.56% during the same period. Its 0.22% expense ratio is extremely low for a managed fund.
T. Rowe Price Dividend Growth Fund
The T. Rowe Price Dividend Growth Fund (PRDGX) is another outstanding mutual fund for dividend investors. Tom Huber has been managing the $14.7 billion fund for 19 years. Huber looks for companies with healthy fundamentals that pay dividends that he expects to increase. The fund invests primarily in large-cap stocks, such as Microsoft, JPMorgan Chase, Apple, and Visa. All pay good dividends and have reliable records of increasing them over time. The fund's 10-year return was 13.30% as of Dec. 31, 2019. Its expense ratio was 0.64%, which is below average for its category.