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


(Robin Hartill, CFP®)

Dividends are a popular source of passive income. If you don’t need the money right now, you can always reinvest your dividends to fuel your returns even further. But dividends are never promised, so relying on just a couple of stocks for their payouts is risky.

That’s where dividend ETFs, or exchange-traded funds, come in. These funds invest across many different dividend-paying companies. Even if a few reduce their dividend payments or eliminate them altogether, the impact on your income or portfolio is minimal.

Ready to use dividends to supercharge your investments? Here are three of the best dividend ETFs available.

Image source: Getty Images.

1. Schwab US Dividend Equity ETF

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If you’re looking to invest in a fund that offers a high dividend yield, look no further than the Schwab US Dividend Equity ETF (NYSEMKT: SCHD). The ETF has a 12-month yield of 2.87% as of April 1. It tracks the performance of the Dow Jones US Dividend 100 index, an index of high-yielding US stocks with a consistent record of dividend payments that are selected for their financial strength.

The fund’s largest concentrations are in financials, technology, and consumer staples. As of Dec. 31, it had 103 holdings, the largest of which were Pfizersemiconductor manufacturer broadcomtechnology conglomerate Cisco Systems, Coca Colaand biopharmaceutical company Amgen.

The fund’s expense ratio is an ultra-low 0.06%. On a $10,000 investment, that translates to annual investment fees of just $6.

2. ProShares S&P 500 Dividend Aristocrats ETF

Dividend yield isn’t the only number you should focus on as a dividend investor. You want companies that have a history of regular dividend increases. Ideally, you want dividend payments that increase at a faster rate than inflation. Companies that have achieved Dividend Aristocrat status are members of the S&P 500 index that have increased their dividend payments for 25 consecutive years or more.

the ProShares S&P 500 Dividend Aristocrats ETF (NYSEMKT:NOBL) is the only ETF that invests exclusively in the Dividend Aristocrats. The fund has a 12-month yield of 1.94% as of April 1.

The ETF’s top three sector weightings are in consumer staples, industrials, and materials. It has 65 holdings as of Feb. 28, the largest of which are manufacturing company A. O. Smithpharmaceutical company abbviespice and seasoning maker McCormickindustrial supplier W. W. Graingerand Hormel Foods.

The fund’s benchmark index, the S&P 500 Dividend Aristocrats index, uses an equal weighting system and includes a minimum of 40 stocks. No single sector can account for more than 30% of the index’s weight. One downside is the fund’s somewhat high expense ratio of 0.35%.

3. Vanguard Real Estate ETF

the Vanguard Real Estate ETF (NYSEMKT: VNQ) invests primarily in real estate investment trusts (REITs). REITs are a reliable source of dividend income because their tax structure requires that they pay out at least 90% of their taxable income to shareholders.

This is by far the largest REIT ETF out there, with more than $80 billion in assets under management and 166 holding companies. the MSCI US Investable Market Real Estate 25/50 index, which broadly tracks the US real estate market, is its benchmark index. Its largest REIT holdings are: prologwhich invests in warehouse properties; American Tower and Crown Castle Internationalboth of which specialize in cell tower and telecommunications infrastructure sites; equinix, a data center REIT; and public-storagewhich is the largest owner, developer, and operator of self-storage properties in the globe.

The fund has an expense ratio of 0.12%, which is about half of the industry average. With a 12-month yield of 2.78% as of April 1, the ETF could be a great choice if you want to invest in real estate without buying physical property and earn a sweet source of dividend income at the same time.

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Robin Hartill, CFP® owns Vanguard Real Estate ETF. The Motley Fool owns and recommends American Tower, Cisco Systems, Crown Castle International, Equinix, ProShares S&P 500 Aristocrats ETF, Prologis, and Vanguard Real Estate ETF. The Motley Fool recommends AO Smith, Amgen, Broadcom Ltd, and McCormick. The Motley Fool has a disclosure policy.