7 Best Dividend ETFs of February 2024

Rising interest rates have sent bond prices into the tank, leaving dividend stocks as a preferred alternative. But dividend ETFs make it even easier to own a diversified portfolio of great dividend stocks than buying each stock individually.

Forbes Advisor has curated a list of the best dividend ETFs, balancing low-fee, passive funds, and actively managed funds that strive to beat the market. The distribution dividend, which is the dividend yield over the prior 12 months, is listed for each ETF.

1. Vanguard International High Dividend Yield ETF (VYMI)

• Expense Ratio: 0.22%
• Dividend Yield: 4.39%
• Avg. Ann. Return Since Inception (February 2016): 7.71%

Why We Picked It:

• Vanguard’s reputable low-cost structure.
• International exposure for portfolio diversification.

2. Invesco S&P 500 High Dividend Low Volatility ETF (SPHD)

• Expense Ratio: 0.30%
• Dividend Yield: 4.58%
• 10-Year Avg. Ann. Return: 8.51%

Why We Picked It:

• High dividends with low volatility.
• Exposure to S&P 500 high-dividend companies.

3. WisdomTree U.S. SmallCap Dividend Fund (DES)

• Expense Ratio: 0.38%
• Dividend Yield: 2.77%
• 10-Year Avg. Ann. Return: 6.77%

Why We Picked It:

• Focus on small-cap dividend-paying stocks.
• Aim for both income and potential growth.

4. FCF International Quality ETF (TTAI)

• Expense Ratio: 0.59%
• Dividend Yield: 2.38%
• Avg. Ann. Return Since Inception (June 2017): 5.06%

Why We Picked It:

• Emphasis on international quality dividend-paying companies.
• Offers a balance of income and quality.

5. Invesco High Yield Equity Dividend Achievers ETF (PEY)

• Expense Ratio: 0.52%
• Dividend Yield: 4.95%
• 10-Year Avg. Ann. Return: 10.15%

Why We Picked It:

• Focus on high-yield dividend achievers.
• Aims for both high income and growth potential.

6. Schwab U.S. Dividend Equity ETF (SCHD)

• Expense Ratio: 0.06%
• Dividend Yield: 3.46%
• 10-Year Avg. Ann. Return: 11.76%

Why We Picked It:

• Low expense ratio.
• Exposure to U.S. dividend-paying companies with a history of stability.

7. Fidelity High Dividend ETF (FDVV)

• Expense Ratio: 0.29%
• Dividend Yield: 3.69%
• Avg. Ann. Return Since Inception (September 2016): 11.6%

Why We Picked It:

• Fidelity’s low-cost structure.
• Aims for high dividend yields and potential growth.

Data is sourced from Morningstar Direct, current as of February 7, 2024, unless noted otherwise.

Methodology:

To compile this list, Forbes Advisor started with a pool of high dividend-paying U.S. and international equity ETFs. The selection criteria included:

1. Expense Ratio: Eliminated funds with expense ratios higher than 0.67%.
2. Dividend Yield: Screened out funds whose dividend yields are below 2.67%.
3. Launch Date: Screened out newer funds launched within three years.
4. Morningstar Star Rating: Discarded ETFs with Morningstar star ratings below three.
5. Diversification: Barred niche sector funds, selecting broadly diversified U.S. and international high dividend equity funds.

The result was a list of 14 funds, from which the top seven were selected based on diverse strategies and fund families. One of the seven ETFs is actively managed, catering to a wide range of investors.

What Is a Dividend ETF?

Dividend ETFs are exchange-traded funds that hold stocks with a strong history of paying dividends to shareholders. They provide an inexpensive income-generating investment asset, managed to match the composition of a dividend index.

How To Choose a Dividend ETF:

When choosing a dividend ETF, consider factors like dividend yield, dividend growth, and dividend quality. Be aware of the trade-off between seeking yield versus appreciation through rising stock prices. Understand the fund’s focus, whether it’s diversified, international, or centered around specific sectors.

Types of Dividend ETFs:

1. Diversified Dividend ETFs: Include companies with higher-than-average dividend payments, potentially with greater risk profiles.
2. International Dividend ETFs: Invest in international companies, providing portfolio diversification.
3. Real Estate Dividend ETFs: Hold shares of real estate investment trusts (REITs) known for rich dividend payouts.
4. Dividend Aristocrat ETFs: Feature stocks with a history of consistently raising dividends.

Dividends ETFs and Taxes:

Dividend ETFs are taxed similarly to the underlying securities within the fund. Dividends, even if reinvested, count as taxable income. Understanding the tax implications, such as whether dividends are qualified or ordinary, is crucial.

Who Should Invest in Dividend ETFs?

Dividend ETFs may appeal to conservative or income investors looking to generate cash flow. They offer the potential for both income and capital appreciation. However, they are not risk-free, and companies can reduce or suspend dividend payments, impacting the ETF’s performance.

Benefits of Investing in Dividend ETFs:

1. Diversification: ETFs own potentially hundreds of stocks, reducing the risk of exposure to individual assets.
2. Low Fees: ETFs typically have lower expense ratios than other investment vehicles.
3. Liquidity: ETFs, traded on exchanges, are easily bought and sold.
4. Transparency: Fund managers disclose holdings daily, providing transparency.
5. Tax Efficiency: ETFs are considered more tax-efficient than mutual funds.

Note: Always conduct thorough research before making investment decisions, and understand the risks

Additional Considerations for Dividend ETF Investors:

While the highlighted ETFs offer attractive features, potential investors should be aware of additional considerations:

1. Market Conditions: Dividend stocks and ETFs can be influenced by market conditions. Economic shifts, interest rate changes, and market volatility may impact dividend payments and stock prices.
2. Risk Tolerance: Assess your risk tolerance and investment goals. High-dividend stocks often come with higher risk, and understanding your risk tolerance is crucial for long-term investment success.
3. Company-Specific Factors: Research individual holdings within the ETFs. A thorough understanding of the companies held can provide insights into the potential stability and sustainability of dividend payments.
4. Diversification: While ETFs inherently provide diversification, it’s essential to consider how these funds fit into your overall investment portfolio. Diversifying across asset classes can further mitigate risks.
5. Tax Considerations: Understand the tax implications of dividend income. Different jurisdictions may have varying tax rates on dividends. Consider consulting with a tax professional to optimize your tax strategy.
6. Expense Ratios: While expense ratios are generally low for ETFs, investors should still be aware of these costs. Compare expense ratios across different funds to ensure cost-effectiveness.
7. Long-Term Perspective: Dividend investing often aligns with a long-term investment strategy. Consider your investment horizon and whether the chosen ETFs align with your financial goals over the long term.

FAQs on Dividend ETFs:

Q: What is a dividend? A: A dividend is a payment made by a company to its shareholders, usually in the form of cash or additional shares. It represents a portion of the company’s profits distributed to investors.

Q: How are dividends taxed? A: Dividends can be taxed as either qualified or ordinary income, depending on factors like holding period and the type of dividends received. Qualified dividends generally receive preferential tax treatment.

Q: What is a dividend yield? A: Dividend yield is the percentage of the current market price of a security represented by the annual dividend. It’s calculated by dividing the annual dividend by the current market price.

Q: How do you calculate dividend yield? A: Dividend yield is calculated by dividing the annual dividend per share by the current market price per share, and then multiplying the result by 100 to express it as a percentage.

Q: What does ex-dividend mean? A: The ex-dividend date is the first day a stock trades without the right to receive the most recently declared dividend. Investors purchasing the stock on or after this date will not receive the upcoming dividend payment.

Conclusion:

Investing in dividend ETFs can be a strategic approach for income-oriented investors seeking a balance of stability and potential growth. The highlighted ETFs provide diverse options catering to different preferences and risk appetites. However, it’s crucial to conduct thorough research, considering factors like market conditions, risk tolerance, and tax implications. Combining dividend ETFs with a well-rounded investment strategy can contribute to building a resilient and income-generating portfolio over the long term. Always consult with financial professionals for personalized advice based on your specific financial situation and goals.