xchange Traded Funds (ETFs) are trending investment tools popular for their mixed attributes of index funds and stocks. It's as if ETFs are the children of an index fund and a stock, inheriting all the best traits from each.
Most ETFs are passively managed, diversified, and low-cost similar to index funds, and just like stocks, they're easily bought through a brokerage account and traded on an exchange at any time during the day.
In this article, we will highlight a type of ETF, high-yield dividend ETFs, it's pros and cons, and the best high-yield dividend ETFs to consider. So, let's dig in!
What Is a High-Yield Dividend ETF?
High-yield dividend ETFs focus on investing in a diversified basket of stocks that offer the potential for both dividend income and capital appreciation. It also provides higher-than-average dividend yields than the stock market, making it an attractive investment option.
As such, they are popular among income-seeking investors looking to build a passive income stream and a long-term, income-generating portfolio.
Should You Invest in a High-Yield Dividend ETF?
Well, before making any investment decision, it's essential to weigh the pros and cons.
Here are some of the pros of high-yield dividend ETFs:
Saves time and effort: High-yield dividend ETFs are passively managed, so you don't need to manage the holdings yourself. The fund manager will do that for you, saving you time and effort.
Income generation: These ETFs are a great source of passive income. They invest in stocks that pay high dividends, thus providing a steady income stream.
Capital Appreciation: Apart from the dividends, the stocks also have the potential for capital appreciation, giving you short-term income as dividends and long-term capital appreciation.
High Diversification: These ETFs are highly diversified as it invests in different stocks paying a high dividend. This helps balance the risk and reduces the impact of market volatility on your investment portfolio.
Liquidity: ETFs are highly liquid as they are traded on stock exchanges. This means you can easily buy and sell fund shares anytime during market hours.
Here are some of the cons of high-yield dividend ETFs:
Market risk: High-yield dividend ETFs carry market risk like all investments. Thus, your investment value can fluctuate based on the market conditions and the performance of the underlying stocks in the fund.
Limited upside potential: These ETFs have less growth potential than growth-oriented investments.
Concentration risk: While most stocks are diversified in high-yield dividend ETFs, some may be heavily concentrated in a particular sector or industry. Thus, increasing the risk of losses if that sector or industry experiences a downturn.
Dividend cuts: Since dividends are paid out of the company's net profit, there is always a risk that they may not pay out dividends or lesser dividends based on their company performance. Overall, impacting your income stream.
What Is a Good Dividend ETF?
Well, there is no exact definition of good dividend ETFs as it is a relative term. It depends based on your risk tolerance, goal, and portfolio strategy.
But, any dividend ETF that provides solid returns and outperforms the average benchmark of the index is considered a good dividend ETF.
Furthermore, it should provide a reliable income stream and potential for long-term growth while maintaining a well-diversified portfolio with low fees and a transparent investment strategy.
Things to Consider Before Investing in High Yield Dividend ETF
Before investing in the ETFs, here are some factors to consider and evaluate:
Objective and Strategy
It's essential to ensure that your investment goals align with the investment options. Thus, you should carefully read the ETF's policy and fact sheet to understand its investment strategy and see if it aligns with your own goals.
You should look for the major holdings of the ETF to ensure that it provides diversification to a range of companies, assets, and industries. Also, looking for ETFs with broad market exposure and many holdings is advisable.
A high dividend might look good, but you should also trace back to the ETF's dividend history to ensure consistency and reliability. Thus, you should invest in ETFs with a long-term track record of consistently paying dividends.
While a higher dividend yield means increased income for investors, balancing this with other factors like the fund's performance and expenses is crucial. Don't solely consider dividend yield as the deciding factor.
Consider the fund's overall return in the past year or decades to understand its track record in generating returns for investors. Thus, opt for the ETFs that consistently outperform their benchmark index over the long term.
A certain portion is deducted from the fund's assets to cover the cost of managing the fund called expense ratios. You should consider EFTs with a lower expense ratio, which means you keep more investment returns.
It's crucial to look at the fund's top holdings to understand the assets the fund has invested in. Choose a fund that has invested in at least a few top and well-known companies to have a sense of reliability and stability. You don't want to invest in the fund that has invested in all unknown startup companies, right?
High-yield dividends are taxed under the capital gain tax. Thus, you may consider holding them in a tax-deferred account such as a traditional IRA or Roth IRA to save on the tax.
How Much Should You Invest in ETF?
Well, there is no one size fit approach on how much to invest in ETFs. It may vary based on investment goals, risk tolerance, and financial situation. However, financial experts suggest allocating 10% to 30% of a portfolio to ETFs for a diversified and passive investment strategy.
However, allocating 75% or more to ETFs may be appropriate if you seek a more passive income strategy. Conversely, if you seek higher returns, you may allocate 10% or less to ETFs and instead invest more heavily in individual stocks or actively managed funds.
Ultimately, how much you should invest will depend on your individual investment goals and risk tolerance.
Best High-yield Dividend ETFs to Consider
Numerous high-yield dividend ETFs are available in the market, and it's understandable to feel confused about which one to choose. Here are some of our recommendations for the top five high-yield dividend ETFs to consider:
At a Glance
If you are looking for an investment option to diversify your portfolio with higher return globally, you might consider Vanguard International High Dividend Yield ETF (VYMI).
VYMI offers exposure to a wide range of domestic and international stocks with a high dividend yield of 5.29%. Additionally, it has a low expense ratio of 0.22%, making it a cost-effective investment option.
Not to mention, Vanguard is one of the top providers of ETFs. The fund's significant holdings include well-established and financially sound companies such as Shell plc, Roche Holding AG, and Toyota Motor Corp. These companies are leaders in their respective industries and have a track record of consistent dividend payments.
VYMI has delivered a solid performance for investors with a YTD return of 7.98% for market price and 7.65% for NAV. And while the fund's exposure is primarily to developed markets, with limited exposure to emerging markets, its significant sectors include healthcare, financials, energy, and consumer staples.
Overall, the Vanguard International High Dividend Yield ETF (VYMI) provides a good balance of global diversification, low expense ratio, and high dividend yield and is an excellent option if you are considering investing in high-yield ETFs.
If you are looking for a low-volatility investment option that provides exposure to high-dividend-yielding stocks in the S&P 500 index. In that case, Invesco S&P 500 High Dividend Low Volatility ETF (SPHD) is worth considering.
This fund offers a dividend yield of 4.07%. It has significant holdings in well-established companies such as Simon Property Group Inc, VICI Properties Inc, Federal Realty Investment Trust, Dominion Energy Inc, and Boston Properties Inc. It's worth noting that the fund has a relatively higher allocation to the real estate sector, followed by utilities.
Furthermore, the fund has an expense ratio of 0.30% and currently sells for the market price of $41.96, making it a cost-effective investment.
Overall, the Invesco S&P 500 High Dividend Low Volatility ETF strikes a good balance between income and volatility management, making it attractive for investors looking for a low-risk, high-reward investment option.
If you're looking to invest in small-cap U.S. stocks that pay dividends, the WisdomTree U.S. SmallCap Dividend Fund (DES) is worth considering.
This ETF boasts a dividend yield of 3.64%. It has a portfolio of significant holdings, including Cogent Communications Holdings, EPR Properties, Scotts Miracle-Gro Co/The, Cal-Maine Foods Inc, Radian Group Inc, and Arch Resources Inc.
The fund's top sectors are financials, industrials, consumer discretionary, and real estate. With an expense ratio of 0.38% and a market price of $26.82, the WisdomTree U.S. SmallCap Dividend Fund is relatively affordable.
Moreover, with a 30-day SEC Yield of 3.21%, the fund's focus on small-cap stocks provides you with more significant growth potential, albeit with slightly higher risk than large-cap stocks.
Overall, the WisdomTree U.S. SmallCap Dividend Fund is a solid investment option for those comfortable with a slightly higher expense ratio and willing to take on more risk for higher returns.
If you are searching for a passive investment strategy focusing on high-quality dividend-paying stocks at lower cost, The Schwab U.S. Dividend Equity ETF is the best option.
With a dividend yield of 3.68%, SCHD invests in stocks of companies that have a history of paying sustainable and high-quality dividends. It has the lowest expense ratio, at just 0.060%, compared to other picks.
SCHD's portfolio includes significant holdings such as PepsiCo Inc, AbbVie Inc, Coca-Cola, Pfizer Inc, Home Depot Inc, and Chevron Corp. These companies represent diverse sectors, including industrials, healthcare, and financials consumer staples, information technology, and energy. The fund currently sells for $71.82.
Thus, ETF could be perfect if you seek a passive investment strategy focusing on high-quality dividend-paying stocks. Its low expense ratio makes it attractive if you are looking to minimize costs.
Additionally, the ETF's diversified portfolio of stocks across various sectors could provide you with a balanced exposure to the market, making it an attractive, cost-effective investment option.
If you seek a passive investment strategy focusing on high-quality dividend-paying stocks, you should consider the Fidelity High Dividend ETF.
This ETF has a dividend yield of 3.80% and boasts a low expense ratio of just 0.29%, meaning that more of your returns will stay in your pocket instead of going towards fees.
But that's not all. The Fidelity High Dividend ETF has a 30-day SEC Yield of 4.05%, and with a market price of $38.57, this ETF is priced reasonably for its value.
In terms of holdings, this ETF invests in a portfolio of well-known stocks that have a consistent track record of paying high dividends. These include Apple Inc, Microsoft Corp, Procter & Gamble Co, Exxon Mobil Corp, and JPMorgan Chase & Co. These companies are known for their strong financial performance and have a history of rewarding their shareholders with high dividends.
Overall, the Fidelity High Dividend ETF is a great choice if you are looking for a reliable income stream through dividend-paying stocks. And with a diversified portfolio of well-established companies, this ETF can also provide long-term growth potential.
So if you're seeking to boost your income while minimizing fees, this ETF could be an excellent option.
High-yield dividend ETFs is carefully picked a basket of high dividend-paying stocks that ensures you have a steady flow of passive income. It's crucial to consider various factors to select the right high-yield dividend ETFs that align with your investment goal, strategy, and risk tolerance. With the right ETFs in your basket, you can enhance your portfolio and enjoy a passive steady flow of income.