4 Best-in-Class ETFs to Seek Dividends | Personal Finance

(Ryan Downey)

Dividend stocks are increasingly on the radar of investors these days as tech stocks enter a bear market, and ETFs can provide a great way to build a diversified portfolio of dividend stocks. The ETF universe is made up of thousands of funds, many of which offer different approaches to generating returns and can play different roles in your portfolio.

Let’s take a closer look at four of these ETFs known for providing dividend income, though they may use different approaches.

1. Vanguard High Dividend Yield ETF

This Vanguard High Dividend Yield ETF (NYSE: VYM) is one of the most popular dividend-focused ETFs on the market. It has a relatively simple and conservative approach, but it still brings great diversification and high yields.

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The fund selects stocks based on next year’s forecast dividends and selects the top half from about 1,000 candidates. The resulting allocation is currently around 450 stocks and the portfolio is market capitalization weighted. That means larger companies make up a disproportionate share of the fund’s holdings, and it tracks major indexes more closely. It also does not include real estate investment trusts (REITs).

The fund offers an attractive 2.77% distribution yield (an ETF version of a dividend yield), which is quite high for a diversified portfolio in today’s market. Like other popular Vanguard products, this ETF earned a major score for its ultra-low expense ratio of 0.06%. This means that costs do not affect returns. Its high trading volume brings excellent liquidity and low transaction costs, which are also of great benefit to shareholders.

While this is a relatively straightforward approach, investors should understand that a dividend focus can lead to relatively high exposures in the financials, healthcare, and consumer staples sectors.

VYM, REGL, TDIV, SDY Total Return Level Data for YCharts

2. SPDR S&P Dividend ETF

This SPDR S&P Dividend ETF (NYSE: SDY) is another very popular fund that takes a slightly different approach. Selection methods are more stringent, with management teams running screenings to determine sustainable high yields. This involves growth consistency, payout ratio, earnings quality and other factors. Stocks that pass these screens are then weighted by yield rather than market capitalization, resulting in greater exposure to smaller companies. The range of candidates also includes REITs. The ETF currently holds about 120 stocks.

Investors will enjoy the resulting distribution yield of 2.6%. The fund also has good liquidity and low transaction costs. However, a more aggressive selection method would result in an expense ratio of 0.35%. That’s not particularly high, but it does affect the annual net return.

3. First Trust Nasdaq Technology Dividend Index Fund

This First Trust Nasdaq Technology Dividend Index Fund (NASDAQ: TDIV) is another well-known dividend fund that brings a meaningfully different approach. The ETF is more limited in scope, seeking to build a portfolio of 100 telecom and technology stocks listed on U.S. exchanges. It’s weighted by dividend yield, so a handful of established giants won’t dominate the distribution. This approach results in a rather unique combination — most dividend funds aren’t tech-heavy, and most popular tech stocks don’t pay high yields.

This combination delivers a respectable 2.07% distribution yield, but it also generates higher volatility. The First Trust Nasdaq Technology Dividend Index Fund’s price swings are a bit more volatile than other popular dividend ETFs, resulting in greater returns in bull markets and greater losses in bear markets. It also has an expense ratio of 0.5%, well above its cheapest peers. These features make it better for some investors and poor for others.

4. ProShares S&P MidCap 400 Dividend Aristocrats ETF

This ProShares S&P MidCap 400 Dividend Aristocrats ETF (NYSE: REGL) This is an interesting fund for investors looking to limit their exposure to large-cap stocks. This is especially valuable for index investors who see their wealth tied up by a few large companies that dominate the market.

ETFs only hold stocks that have increased their dividends for 15 consecutive years. The fund’s goal is to hold at least 40 stocks of equal weight. It also limits industry exposure to 30% of total allocations. This has forced funds to be flexible on their criteria in some cases, but the overall portfolio is still made up of relatively stable dividend payers.

Investors should be happy with the 2.65% distribution yield. An expense ratio of 0.41% is a bit high, but it’s not a ridiculous price to pay for investors who want this kind of midcap exposure.

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Ryan Downey has no positions in any of the aforementioned stocks. The Motley Fool owns and recommends the Vanguard High Dividend Yield ETF. The Motley Fool has a disclosure policy.


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