The 3 Best ETFs for Dividends | Smart Change: Personal Finance


(James Brunley)

If you’re wishing you had a little more exposure to income investments right now and a little less exposure to growth, you’re not alone. The market’s recent shellacking hasn’t exactly been uniform; growth stocks have really taken it on the chin. And their sell-off may not be over yet.

The good news is, it’s not too late to start shifting more of your portfolio into dividend-paying positions. You don’t even have to do any stock picking to make this happen, either. This trio of exchange-traded funds (ETFs) can do the job in a snap. Here’s a closer look at each.

iShares High Dividend Equity Fund

If your goal is producing above-average dividend income right now, your first stop should arguably be the iShares High Dividend Equity Fund (NYSEMKT: HDV).

Just as the name implies, this iShares fund seeks to maximize your payout by choosing stocks with superior dividend yields. That’s not to suggest, however, it merely tracks down the market’s highest-yielding names and shoves them into a bucket you can then buy a piece of. This fund is meant to mirror the Morningstar Dividend Yield Focus Index, which limits its constituents to US stocks “screened for superior company quality and financial health.”

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The end result is a basket of 75 solid stocks that also happen to pay above-average dividends. Among its top holdings right now are names like AbbVie, JPMorgan Chaseand Verizonsupporting the fund’s current yield of around 3.2%.

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That may not seem like a whole lot; you can certainly find bigger yields out there. But you’d be hard-pressed to find better yields without giving up the solid blue chip status all of this fund’s stocks boast.

Vanguard Dividend Appreciation ETF

If you’re more interested in long-term dividend growth than current income levels, consider the Vanguard Dividend Appreciation ETF (NYSEMKT: VIG).

Once again, the name says it all. The ETF is built around tickers that may not necessarily dish out a ton of regular quarterly income now, but rather it holds stocks that reliably grow their payouts in a big way over time. microsoft is this ETF’s top holding at this time, fairly representing the bigger premise here. Microsoft shares are valued at a premium, and while the company doesn’t prioritize dividends, it does pay them. Its priority is growth. It just so happens that its dividend grows in step with the company’s top and bottom lines.

And this ETF certainly accomplishes its goal. Last year’s total payments of $2.66 per share were 46% better than what the fund was paying just five years back, and almost 90% stronger than the annualized dividend from a decade ago.

The trade-off is the yield you’re stepping into. The Vanguard Dividend Appreciation ETF’s current yield is a modest 1.7%. That’s why it’s not an ETF to choose if you need good passive income right now. If you can afford to park some money in the fund now and wait five or 10 years, however, it’ll be well worth it. You should get some respectable capital appreciation in the meantime.

SPDR S&P 500 High Dividend ETF

Finally, add the SPDR S&P 500 High Dividend ETF (NYSEMKT: SPYD) to your list of ETFs to consider if you’re looking to add passive income potential to your portfolio.

At first glance it seems comparable to the aforementioned iShares High Dividend Equity Fund. And there’s some overlap, to be sure. But there’s more difference between the two than it seems on the surface. The SPDR S&P 500 High Dividend ETF is arguably the more aggressive option, with the higher yield to provide it. This fund’s current dividend yield stands at 3.7%, reflecting the fact that the underlying index is focused more on stronger payouts and less on raw fiscal health.

Not that it’s buying junk. Valero Energy, Cardinal Healthand real estate investment trust Iron Mountain are three of the ETF’s 10 biggest holdings at this time, mirroring the S&P 500 High Dividend Index its modeled after.

It’s a distinction that matters more than you might think. The Morningstar Dividend Yield Focus Index serving as the basis for the iShares High Dividend Equity Fund is rather static, since companies that are fiscally healthy tend to remain fiscally healthy, and therefore remain in the index. The S&P 500 High Dividend Index, however, is rebalanced every six months to hold the 80 highest-yielding S&P 500 names at that particular time. While this potentially leads to above-average taxable turnover, it also ensures this ETF offers the highest-possible yield at any given time among the three ETFs in focus here.

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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. James Brumley has no position in any of the stocks mentioned. The Motley Fool owns and recommends Iron Mountain, Microsoft, and Vanguard Dividend Appreciation ETF. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.