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Top 10 Dividend ETFs for Passive Income

The best dividend ETFs for long-term investors charge low fees, maintain nice diversification, keep turnover low, and track benchmarks that apply some filters for business quality and dividend safety.

In this article, you will learn about some of the best dividend ETFs available for you to consider for your own portfolio.

While investing has no short cuts, I believe these dividend ETFs are some of the best ones out there for passive income investors.

Best Dividend ETFs: Schwab U.S. Dividend Equity ETF (SCHD)

Best For: Income and Growth
Dividend Safety: A-
Payout Frequency: Quarterly
Expense Ratio: 0.07%
Fund Inception: October 20, 2011

The fund’s goal is to track the total return of the Dow Jones U.S. Dividend 100 Index. This index is unique in that it selects high-yielding companies with a record of consistently paying dividends and maintaining relatively strong financial ratios.

One hundred stocks are selected to the index based on four fundamentals-based characteristics (cash flow to total debt, return on equity, dividend yield, and five-year dividend growth rate). Each company is subject to screens for dividend payment consistency, size, and liquidity as well. All companies in the index have paid dividends for at least 10 consecutive years.

No single stock can represent more than 5% of the index, and no single sector can represent more than 25% of the index. The fund’s top 10 positions are household names for dividend investors, including Pepsico, Procter & Gamble, Verizon, and Exxon Mobil. REITs, MLPs, preferred stocks, and convertibles are excluded from the index.

While the fund’s dividend yield might be too low for some investors, I think this is one of the best dividend ETFs because of its low expense ratio, filters for business quality and dividend safety, and diversification across sectors and stocks.

Best Dividend ETFs: Vanguard Dividend Appreciation ETF (VIG)

Best For: Growth
Dividend Safety: A-
Payout Frequency: Quarterly
Expense Ratio: 0.08%
Fund Inception: April 21, 2006

The fund’s goal is to track the performance of the NASDAQ U.S. Dividend Achievers Select Index, which focuses on stocks of large-capitalization companies that have raised their dividends for ten or more years. As a result, the fund is concentrated in more reliable dividend-paying stocks.

The fund’s higher quality level was evident during 2008 when its value declined by 27%, easily beating the S&P 500’s total loss of 37%.

Perhaps more impressively, the fund paid out 98 cents per share of dividends during 2009, which was a decrease of less than 5% compared to its total payout in 2008.

For comparison’s sake, the S&P 500’s dividends paid per share, as measured by SPY, fell by 20% from 2008 to 2009.

The Vanguard Dividend Appreciation ETF holds around 180 stocks and is reasonably diversified. Its top 10 largest holdings account for about 30% of its total assets, but the Industrials sector does account for just over 30% of the fund’s equity exposure, making its performance more sensitive to the economy.

The fund’s small dividend yield might turn away some investors, but its low fees and focus on quality make it appealing for long-term dividend growth investors.

Best Dividend ETFs: iShares Core High Dividend ETF (HDV)

Best For: Income
Dividend Safety: B+
Payout Frequency: Quarterly
Expense Ratio: 0.08%
Fund Inception: March 29, 2011

The fund’s goal is to track the Morningstar Dividend Yield Focus Index, which offers exposure to high quality U.S. companies that have had strong financial health and an ability to sustain above average dividend payouts.

The index is comprised of qualified dividend-paying stocks that are screened for superior company quality and financial health as determined by Morningstar’s proprietary index methodology.

Morningstar’s methodology determines company quality in accordance with the Morningstar Economic Moat rating system, in which companies are expected to earn above-average profits and sustain their dividend.

Financial health is determined using Morningstar’s Distance to Default measure, which estimates a company’s probability of default.

Companies in the index must have a moat rating of “narrow” or “wide” and a Distance to Default score in the top 50% of eligible companies. The stocks in the index represent the top 75 yielding stocks meeting the screening requirements.

The fund also holds 75 stocks, and its top 10 holdings accounted for close to 60% of its total assets. While the fund is more concentrated than I generally prefer, its largest weights are in blue chip stocks such as Exxon Mobil, Johnson & Johnson, and Verizon. The fund’s largest sector exposure is about 20%.

Considering the quality filters and low expense ratio, iShares Core High Dividend ETF is an interesting option for retirement income.

Unfortunately the fund was launched in 2011 so we don’t know how its dividend payout was impacted by the last recession, but it would seem to possess above-average safety characteristics.

Best Dividend ETFs: PowerShares S&P 500 High Dividend Low Volatility ETF (SPHD)

Best For: Income
Dividend Safety: C+
Payout Frequency: Monthly
Expense Ratio: 0.30%
Fund Inception: October 18, 2012

The fund’s objective is to match the performance of the S&P 500 Low Volatility High Dividend Index, which consists of 50 stocks in the S&P 500 Index that have historically provided high dividend yields with lower volatility.

The index is created by identifying the 75 stocks with the highest dividend yields over the past 12 months, with no sector allowed to contribute more than 10 stocks. From those securities, 50 stocks with the lowest volatility over the past 12 months are included.

Companies that are experiencing distress are likely to have more volatile stocks, which is why the fund focuses on stocks with the lowest volatility.

While kicking out more volatile stocks helps, historical volatility is not a great forward-looking indicator of business quality and dividend safety. For that reason, I rate the fund’s dividend safety just above average – C+.

The fund pays monthly dividends, and conservative income investors might get some comfort knowing that around 35% of the fund’s assets are allocated to utilities and consumer staples stocks, which are known for steady payouts. However, its substantial investments in REITs and utilities also make it more sensitive to interest rates.

This is another fund that launched after the recession, so unfortunately I don’t know how much it would have cut its dividend during the last major dip in the economy. However, I would suspect its cut would have been close to the S&P 500’s dividend reduction of 20%.

Best Dividend ETFs: Vanguard High Dividend Yield ETF (VYM)

Best For: Income
Dividend Safety: C
Payout Frequency: Quarterly
Expense Ratio: 0.08%
Fund Inception: November 10, 2006

The Vanguard High Dividend Yield ETF seeks to track the performance of the FTSE High Dividend Yield Index, which measures the investment return of common stocks of companies characterized by high dividend yields.

The fund is extremely well-diversified with more than 400 stocks in the portfolio, and no sector accounts for more than 16% of the fund’s total assets. The top 10 positions are all blue-chip stocks and add up to less than 30% of total assets.

Since there are no quality filters that go into creating the index (it’s all based on dividend yield), I gave the ETF a “C” rating for dividend safety.

During the last recession, VYM reduced its dividend payments from $1.44 per share in 2008 to a low of $1.09 in 2010, representing a decline of 24%. The S&P 500 Index saw its dividend payments fall by about 20%, which supports the fund’s average dividend safety rating.

Despite the dividend cuts, VYM’s total return was reasonable in 2008. The ETF fell by 32%, which was slightly better than the S&P 500’s return of -37%.

Some of the other high-yield dividend ETFs are likely better bets because they incorporate more business quality and dividend safety measures, but it’s also hard to ignore the Vanguard brand name and very low expense ratio of this fund.

Best Dividend ETFs: S&P Dividend ETF (SDY)

Best For: Income and Growth
Dividend Safety: C
Payout Frequency: Quarterly
Expense Ratio: 0.35%
Fund Inception: November 8, 2005

The fund’s goal is to match the returns of the S&P High Yield Dividend Aristocrats Index. The index is comprised of companies in the S&P Composite 1500 Index that have consistently increased their dividend for at least 20 consecutive years, and weights the stocks by yield.

The S&P Dividend Aristocrats Index is a favorite source of ideas for income investors, and the S&P High Yield Dividend Aristocrats Index simply expands the universe of eligible companies from 500 (S&P 500) to 1,500 (S&P 1500).

Few companies have maintained a dividend growth streak for at least 20 straight years, so this dividend ETF theoretically targets some of the higher quality dividend-paying stocks. However, buying up the highest-yielding stocks in this group can still lead to trouble.

The fund reduced its dividend payments by 22% in 2009, about in line with the S&P 500’s total dividend cut. However, the S&P Dividend ETF still relatively performed well overall, falling by 23% compared to the S&P 500’s decline of 37%.

Investors can also take some comfort in the fund's diversification. No holding exceeds more than 3% of the fund's overall value, and no sector accounts for more than 20%.

For investors looking to gain exposure to companies with a relatively high yield and a track record of growing their dividends, the S&P Dividend ETF might be one to consider.

Best Dividend ETFs: WisdomTree U.S. Quality Dividend Growth ETF (DGRW)

Best For: Growth
Dividend Safety: B-
Payout Frequency: Monthly
Expense Ratio: 0.28%
Fund Inception: May 22, 2013

The fund seeks to track the investment results of dividend-paying large-cap companies with growth characteristics in the U.S. equity market.

The index is comprised of 300 companies in the WisdomTree Dividend Index, which defines the dividend-paying universe of companies in the U.S. stock market, with the best combined rank of growth and quality factors.

This is one of the best dividend ETFs because it screens companies based on long-term earnings growth expectations, return on equity, and return on assets. While not perfect, these factors can remove some of the lower-quality, slower-growing dividend stocks from the fund.

Each stock must also have a market cap of at least $2 billion to be included in the index, which further improves the stability of the fund since small cap stocks are more volatile.

Diversification is also a plus since the maximum weight of any stock is capped at 5%, and no single sector can account for more than 20% of the fund’s total assets. Each stock is weighted by its projected dividend income over the coming year rather than market cap.

The fund’s track record unfortunately is not long enough to see how it performed during the last recession, but it would seem to possess above-average characteristics when it comes to business quality and dividend safety.

Best Dividend ETFs: ProShares S&P 500 Dividend Aristocrats ETF (NOBL)

Best For: Growth
Dividend Safety: A-
Payout Frequency: Quarterly
Expense Ratio: 0.35%
Fund Inception: October 9, 2013

The S&P 500 Dividend Aristocrats Index is one of the most popular places dividend investors turn to for ideas. Each of its holdings has increased dividends for at least 25 consecutive years and is a member of the S&P 500 Index.

It’s no wonder why this relatively new fund, which seeks to track the results of the S&P 500 Dividend Aristocrats Index, is considered one of the best dividend ETFs.

Few large companies have maintained such a long dividend growth streak, which is usually an indication of a blue-chip company with numerous competitive advantages.

Since its inception, the fund has outperformed the S&P 500 with lower volatility. It contains just over 50 holdings, which are equally-weighted and reasonably diversified between sectors (the largest sector is consumer staples at 25% of the fund’s total assets).

For investors looking to gain exposure to a number of proven dividend growth stocks, the S&P 500 Dividend Aristocrats fund is one of the best dividend ETFs to consider.

Best Dividend ETFs: FlexShares Quality Dividend Index Fund ETF (QDF)

Best For: Income and Growth
Dividend Safety: B-
Payout Frequency: Quarterly
Expense Ratio: 0.37%
Fund Inception: December 14, 2012

The fund seeks investment results that correspond generally to the price and yield performance of the Northern Trust Quality Dividend Index.

Companies included in the index are selected based on expected dividend payment and fundamental factors such as profitability, management expertise, and cash flow.

I like that the index includes these business quality factors, but unfortunately the fund’s history is not long enough to review how it performed during the financial crisis. However, it would seem to have above-average dividend safety characteristics.

Diversification is another strength of this dividend ETF. The fund holds around 150 stocks, and its largest position is less than 5% of its total assets. No single sector makes up more than 25% of the fund’s total value either.

Overall, this seems like one of the best dividend ETFs because it offers a higher yield than the broader market, puts some emphasis on business quality to reduce risk, and charges a reasonable fee.

Best Dividend ETFs: WisdomTree LargeCap Dividend Fund (DLN)

Best For: Income and Growth
Dividend Safety: C
Payout Frequency: Monthly
Expense Ratio: 0.28%
Fund Inception: June 16, 2006

The fund seeks to track the performance of dividend-paying large-cap companies in the U.S. equity market. The WisdomTree Large Cap Dividend Index consists of the 300 largest companies ranked by market cap from the WisdomTree Dividend Index, which defines the dividend-paying universe of companies in the U.S. stock market.

The index is dividend weighted each year to reflect each company’s share of projected dividends for the coming year.

The ETF is also well diversified. No sector accounts for more than 20% of the fund’s total assets, and no stock exceeds 4% of the fund’s value.

The fund fell by 35% in 2008, roughly matching the S&P 500’s decline. Its dividend payments were also cut from $1.56 per share in 2007 to $1.45 in 2008 and $1.15 in 2009.

The total decline in annual dividend payments from 2007 to 2009 was 26%, somewhat worse than the broader market’s dividend cut of 20%.

This dividend ETF is most appropriate for investors seeking exposure to large cap dividend-paying stocks. It would have been nice if the fund followed an index that incorporated some business quality filters, but focusing on large cap stocks makes the fund’s long-term performance more predictable. 

Closing Thoughts on the Best Dividend ETFs

There are over 100 dividend-focused ETFs out there, but many of them are not appealing enough for me to consider buying them. The best dividend ETFs charge low fees, focus on business quality, and maintain strong diversification.

However, even the best ETFs still experienced substantial dividend reductions during the last recession. Investors living off dividends in retirement from ETFs should remain aware of this risk and the fees that reduce the performance of their ETF holdings.

While dividend ETFs can provide substantial time savings and reduce stress, I believe an investor who builds his or her own portfolio with individual stocks can realize meaningful fee savings and earn a higher quality dividend yield. 

There’s no right or wrong answer regarding the ideal mix of dividend ETFs and individual stocks in a portfolio – it’s ultimately a personal preference in most cases.

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