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To generate a passive stream of income along with the potential for capital appreciation, many investors utilize dividend ETFs in their portfolios.
But you may think that investing in dividend ETFs is as easy as dumping your money into the ETFs with the highest yields. The higher the yield, the better. Right?
Not quite. Sometimes if it sounds too good to be true, it probably is. In fact, sometimes an unusually high yield could be a major red flag. Some struggling companies use high dividends merely to attract investors. And some stocks offer high yields, but have other potential flaws like high volatility. So you don’t want to fall for these traps.
You need to carefully examine dividend ETFs. The most successful ones screen companies for more than just attractive yields. They also look for companies with strong financials like cash flow and revenue. Some ETFs also look out for volatility, fees, performance and more.
So to make it easier for you, we devised a list of five dividend ETFs you may want to look at instead of chasing the 9%+ yield traps you’ll find out there.
So let’s take a closer look.
Schwab U.S. Dividend Equity ETF (SCHD)
The Schwab U.S. Dividend Equity ETF (SCHD) stands out for several features. Its strategy is to invest in high-quality companies with strong fundamentals and consistency in paying out dividends. It also shines for its ultra-low expense ratio of 0.06%.
Moreover, it has generated a five-year return of over 35% and offers a high yield of around 4%.
SCHD is heavily invested in defensive sectors like consumer staples and healthcare. Defensive sectors are recognized for generally remaining resilient even during market downturns. This can give investors sustainability and confidence. And its holdings in well-established companies can offer a reliable stream of income and capital appreciation. Plus, SCHD holds net assets of about $71.64 billion.
SPDR S&P Dividend ETF (SDY)
The SPDR S&P Dividend ETF (SDY) invests in what Wall Street refers to as the Dividend Aristocrats. It seeks out companies that have consistently raised their dividends for at least 20 consecutive years. This ensures the ETF keeps its eye on companies with the financial strength and stability to consistently pay and increase dividend payouts over time.
SDY’s top holdings are in the industrials, consumer staples and utilities sectors. The fund delivers a yield of about 2.61% and has generated a five-year return of about 40%. But it has a slightly higher expense ratio than other funds on our list at 0.35%. Still, its strategy may prove beneficial to dividend investors in the long run.
Vanguard Dividend Appreciation ETF (VIG)
The Vanguard Dividend Appreciation ETF (VIG) stands out for stability and diversification. It invests in more than 300 large-cap companies with histories of increasing their dividends year over year and have strong fundamentals. The majority of its holdings are in the information technology sector, which has received a boost from the artificial intelligence (AI) movement. Other top holdings include companies in the financial and healthcare sectors.
VIG has delivered a five-year return of over 60% and pays a yield of about 1.62%. Moreover, Vanguard is known for offering funds with expense ratios that are among the lowest in the industry. VIG has a competitive expense ratio of 0.05%.
Invesco S&P 500 High Dividend Low Volatility ETF (SPHD)
The Invesco S&P 500 High Dividend Low Volatility ETF (SPHD) aims to pull investors away from value traps by focusing on stocks that offer high yields, but avoids those that also have high volatility. This strategy could create a portfolio of companies that may remain stable even under market downturns.
SPHD is heavily invested in the real estate, consumer staples and utilities sectors. And it has a five-year return of about 28% and a yield of around 4%. However, it has a slightly high expense ratio of 0.30%.
State Street SPDR Portfolio S&P 500 High Dividend ETF (SPYD)
The State Street SPDR Portfolio S&P 500 High Dividend ETF (SPYD) aims to balance high income with capital appreciation. It attempts this by investing in some of the highest dividend-yielding companies within the S&P 500 Index. SPYD generates a high yield of about 4.53%. And it has a five-year return of about 31%. Moreover, SPYD maintains a low expense ratio of 0.07%.
The fund’s main holdings are amongst the real estate, financials and consumer staples sectors.