Assets in U.S. dividend-focused exchange-traded funds (ETFs) have grown exponentially over the past decade. In 2009, America's dividend ETFs collectively held less than $20 billion. By September 2021, assets in dividend ETFs had shot up to almost $300 billion.
In good times and bad, dividend stocks act almost like rent checks, coming quarterly or even monthly like clockwork. Many investors, whether you're a professional working on Wall Street or a regular Joe on Main Street, swear by them.
"Dividend-paying stocks purchased through funds and ETFs offer the appeal of income and potential growth, a particularly appealing combination for investors frustrated with the low interest rate environment," says Dan Kern, Chief Investment Officer at TFC Financial Management.
"The combination of income and potential growth may be really important given the need to extend retirement savings through longer expected lifespans. There are multiple factors to consider in selecting high-dividend investments. Dividend-oriented ETFs aren't all the same, so buyer beware."
If you're in this camp of income-minded set-it-and-forget-it investors, here are 11 of the best dividend ETFs to buy and hold for the long haul. Several are dedicated specifically to dividends, while others simply hold dividend stocks as an indirect result of their strategy. But this is a collection of dividend ETFs that are diversified by geography, style, size, sector and more, and thus can be held as a group or individually depending on your preferences, risk tolerance and investment horizon.
Data as of Sept. 12. Dividend yields represent the trailing 12-month yield, which is a standard measure for equity funds.
Vanguard Dividend Appreciation ETF
- Type: Large-cap blend
- Assets under management: $63.0 billion
- Dividend yield: 1.5%
- Expenses: 0.06%, or $6 annually on a $10,000 investment
The Vanguard Dividend Appreciation ETF (VIG, $160.18) tracks the performance of the S&P U.S. Dividend Growers Index, a collection of U.S. stocks that have increased dividends annually for at least the past 10 years. The index replaced the Nasdaq U.S. Dividend Achievers Select Index as VIG's target benchmark in the third quarter of 2021.
The S&P index has an annual exclusion rule whereby the top 25% highest-ranked eligible companies are removed from the index. In addition, S&P will remove the top 15% by dividend yield from the index to avoid excessive inventory turnover. Finally, no stock may account for more than 4% of the index.
While it might seem like the ETF is changing, in reality, Vanguard is making a move so that VIG more closely meets its investment objectives related to dividend indexing.
As Kern notes, Vanguard Dividend Appreciation is one of the best of the larger dividend-focused ETFs available.
"VIG invests in a well-diversified portfolio of high-quality companies that offer current dividend yield, as well as potential dividend growth. VIG's holdings grew dividends by more than 7% over the past three years, and include companies with strong cash flows, solid balance sheets and durable business models," he says.
Top holdings include the likes of Microsoft (MSFT), Walmart (WMT), JPMorgan Chase (JPM), Procter & Gamble (PG) and UnitedHealth Group (UNH).
"VIG is well-diversified at the sector level, offering a much more balanced portfolio than either the iShares Select Dividend ETF (DVY) or the SPDR S&P Dividend ETF (SDY)," Kern adds.
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Fidelity MSCI Real Estate ETF
- Type: Sector (Real estate)
- Assets under management: $2.0 billion
- Dividend yield: 2.8%
- Expenses: 0.09%
Real estate investment trusts (REITs) have done well since the global financial crisis thanks to low interest rates and a reasonable pace of real estate development. This has provided landlords with a nice combination of increased rent, solid occupancy rates and rising property valuations.
COVID-19 slowed various parts of the industry. Retail and office real estate, for instance, struggled mightily thanks to lockdown orders and voluntary closures. However, the downturn was brief, and the real estate sector has bounced back sharply in 2021.
The Fidelity MSCI Real Estate Index ETF (FREL, $31.75) provides a wide variety of properties. In 2020, the fund took a step back, generating a total return of 4.9% on the year. But in 2021, FREL has been one of the best dividend ETFs to own. Year-to-date, it has a total return of 27%, considerably higher than the 18.7% gain for the S&P 500.
As a result of this strong performance, income investors might not be as eager to buy into this real estate play as a year ago. But, on the flip side, its dividend yield is still more than double that of the broader index.
FREL tracks the performance of the MSCI USA IMI Real Estate Index, a collection of more than 160 real estate stocks. Top holdings include the likes of telecom-infrastructure stock American Tower (AMT), logistics REIT Prologis (PLD) and data center real estate play Digital Realty Trust (DLR).
This dividend-friendly Fidelity fund also charges an inexpensive 0.09%, far cheaper than the asset class's median cost. Over the past five years, its 9.8% average annual return has been 1.4 percentage points better than its peers.
If you're looking for a cheap way to own real estate, FREL is it.
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FlexShares Quality Dividend ETF
- Type: Large-cap value
- Assets under management: $1.6 billion
- Dividend yield: 1.6%
- Expenses: 0.37%
One of the things that makes the FlexShares Quality Dividend Index Fund (QDF, $57.59) an attractive investment is that it seeks to invest in companies with sustainable yields. A company's core financial health must be strong enough to continue to pay attractive dividends over the long haul.
That's where the quality factor comes in.
QDF tracks the performance of the Northern Trust Quality Dividend Index: a group of high-quality, income-oriented U.S. stocks that are selected based on the expected dividend payment combined with fundamental factors such as profitability, management expertise and cash-flow generation.
This dividend ETF currently invests 71% of assets in large-cap stocks, approximately 22% in mid-cap stocks and the remaining 7% in small-cap stocks and cash. There's a value bent (43%), with another 37% considered "blended" and just 20% growth.
Information technology (29%) is the biggest chunk of the fund, followed by 14% in financials and another 11% in healthcare. QDF holds 130 stocks, but top holdings Apple, Microsoft and JPMorgan alone make up about 17% of assets.
As far as large-cap dividend ETFs go, FlexShares Quality Dividend ETF is a little on the pricier side. Part of that is its regular expenses of 0.37% annually. Also, the index is reconstituted and rebalanced four times a year, leading to an annual turnover rate of 75%, which brings up internal trading costs.
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Invesco FTSE RAFI US 1000 ETF
- Type: Large-cap value
- Assets under management: $5.3 billion
- Dividend yield: 1.5%
- Expenses: 0.39%*
The Invesco FTSE RAFI US 1000 ETF (PRF, $161.10), like a few other funds on this list, isn't necessarily found under a "dividend ETFs" banner; instead, it uses dividends almost like a measure of quality.
PRF tracks the performance of the FTSE RAFI US 1000 Index: a fundamental index that ranks the largest U.S. companies by 1) average sales over the past five years, 2) cash flow over the same period, 3) total dividend distributions over the same period and 4) the book value at the time of review.
The ETF typically holds around 1,000 stocks, which are plucked out of the FTSE USA All Cap Index – a group of 1,763 U.S. large-, mid- and small-cap equities. These stocks are ranked according to those four fundamental measures and assigned a score. The companies with the highest scores are selected for inclusion. This process happens once a year, each March.
Ultimately, this is a value fund, which should be attractive to the growing party of people who believe value will continue to make a comeback. It also has a 1.5% yield – not high, but certainly higher than the broader market at the moment.
If you buy PRF, you'll be holding a fund that's pretty well diversified across the spectrum, but heaviest in financials (19%) and information technology (13%) at the moment. Apple is the top holding at 2.2% of assets, but interestingly enough, you get a little extra AAPL via Berkshire Hathaway (BRK.B), which accounts for 1.8% of the fund. Apple is Berkshire's largest equity holding.
* Includes 1-basis-point fee waiver.
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iShares Russell 1000 Growth ETF
- Type: Large-cap growth
- Assets under management: $74.9 billion
- Dividend yield: 0.5%
- Expenses: 0.19%
The iShares Russell 1000 Growth ETF (IWF, $288.27) is not, categorically speaking, a dividend fund. But it's included in this list of dividend ETFs because it adds an essential part of any balanced portfolio – growth – while delivering at least some income.
The IWF is one of the 15 largest ETFs in the U.S. by assets under management. It tracks the performance of the Russell 1000 Growth Index – a subset of the Russell 1000, which contains a thousand of the largest companies on U.S. markets. Simply put, these are companies that are expected to grow at an above-average rate relative to the market.
IWF's 496 holdings are unsurprisingly loaded with tech stocks, which make up nearly 45% of assets. It also gives double-digit weights to consumer discretionary and communication stocks, with healthcare close behind at 9%. Several other sectors, including consumer staples, have less than 5% weightings.
It's also extremely top-heavy, with Apple, Microsoft, Amazon.com (AMZN), Google parent Alphabet (GOOGL) and Facebook (FB) alone accounting for more than a third of the fund's weight.
But IWF's weight is contributing to (and is also a result of) its outperformance of both the Russell 1000 Value and blended Russell 1000 ETF counterparts. IWF has returned 19.7% annually over the past decade, versus 16.7% for the iShares Russell 1000 ETF (IWB) and 13.3% for its value stocks counterpart.
Meanwhile, several of IWF's larger holdings boast notable dividend growth, including Visa, Home Depot and even Apple.
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JPMorgan BetaBuilders Canada ETF
- Type: International stock (Canada)
- Assets under management: $5.7 billion
- Dividend yield: 2.3%
- Expenses: 0.19%
It's important to diversify not only across sizes and sectors, but borders, too. That's true even when your focus is on dividend income.
If you don't, you're prone to home-country bias: a condition that creates an over-reliance on U.S. stocks. It's something that has become more prevalent in recent years as U.S. stocks have outperformed most other developed markets.
There's no need to overdo it, of course. The U.S. still accounts for well more than half of the world's market capitalization, and a diversified portfolio should most always contain a core group of U.S. holdings. But it also couldn't hurt to consider international funds, such as the JPMorgan BetaBuilders Canada ETF (BBCA, $64.81).
BBCA launched in mid-2018. This young fund tracks the Morningstar Canada Target Market Exposure Index, providing exposure to the top 85% of Canada's market capitalization. Today, the ETF holds 84 Canadian stocks with an average market cap of $44.5 billion.
Like many single-country funds, BetaBuilders Canada ETF is top-heavy in more than one way. For one, the largest 10 holdings – which include Shopify (SHOP), Royal Bank of Canada (RY) and Toronto-Dominion Bank (TD) – make up more than 47% of the fund's assets. It's also loaded with financial stocks, at 37% of the fund, almost triple the next closest sector (energy, at 13%). Seven sectors have single-digit exposure.
BBCA isn't explicitly a dividend-focused ETF, but a healthy helping of Canadian dividend stocks nonetheless provides a yield that's far better than what you're getting from broad-market U.S. equity funds. The reasonable 0.19% fee is nice, too.
Oh, Canada, indeed.
Learn more about BBCA at the JPMorgan Asset Management provider site.
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Nuveen ESG Mid-Cap Value ETF
- Type: Mid-cap value
- Assets under management: $252.4 million
- Dividend yield: 1.1%
- Expenses: 0.4%
The Nuveen ESG Mid-Cap Value ETF (NUMV, $36.85) brings more than 50 years of socially responsible and ESG (environmental, social and governance) investing to mid-cap stocks, which many believe to be the sweet spot of equities.
That's because midsize companies tend to be at a stage in their lives where they've figured out their business models and are growing much faster than their large-cap peers while still being stable enough to withstand the occasional downturn. Again, factor in the idea that value stocks could make a long-term return to investor favor, and you've got an ETF that's ready for primetime.
NUMV tracks the performance of the TIAA ESG USA Mid-Cap Value Index, which looks for mid-cap value stocks whose underlying companies adhere to various ESG standards – everything from the impact on climate change to sourcing practices to business ethics. The fund currently holds 87 positions.
Financials (21%), industrials (16%) and real estate (15%) are the three largest sectors. And the fund is fairly balanced from stock to stock, with the top 10 holdings accounting for roughly 20% of the ETF's total net assets.
Nuveen ESG Mid-Cap Value, which launched in December 2016, boasts a three-year annualized total return of 11.4% that beats the mid-cap value category average by about 167 basis points. (A basis point is one one-hundredth of a percentage point.)
Long term, it makes sense to invest in the mid-cap category. However, NUMV is one of the best dividend ETFs to ensure you do so in a responsible manner.
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ProShares Russell 2000 Dividend Growers
- Type: Small-cap blend
- Assets under management: $816.1 million
- Dividend yield: 1.8%
- Expenses: 0.41%
The yield from the ProShares Russell 2000 Dividend Growers ETF (SMDV, $62.07) is on the low side among pure-play dividend ETFs. But yield isn't the point.
Several funds focus on dividend growth as a measure of a company's quality, and tend to have smaller current yields as a result. SMDV – which puts it right in the name ("Dividend Growers") – is one such fund. Indeed, it's the only ETF that invests exclusively in the best dividend growth stocks in the small-cap Russell 2000 Index.
SMDV is a small portfolio of just 91 companies that have been selected because they've increased their annual dividend at least once each year for a decade without interruption. They're typically able to do so by delivering stable earnings and consistent growth.
The stocks in the index are equally weighted, meaning that each time the fund is rebalanced – which happens quarterly – every stock accounts for the same amount of the fund's assets.
The index must have a minimum of 40 stocks. If there aren't enough stocks with a history of at least 10 years of consecutive dividend increases, SMDV will include stocks with shorter histories to get to 40.
SMDV's constituents have an average market value of $2.6 billion. Top holdings right now include water utility Middlesex Water (MSEX), specialty medical device manufacturer Atrion (ATRI) and asset manager Cohen & Steers (CNS).
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Schwab Fundamental Emerging Markets Large Company Index ETF
- Type: Diversified emerging markets
- Assets under management: $5.0 billion
- Dividend yield: 2.3%
- Expenses: 0.39%
Before the coronavirus struck, many in the asset management business believed emerging markets would have a bounce-back year in 2020. Unfortunately, that didn't come to pass.
The Schwab Fundamental Emerging Markets Large Company Index ETF (FNDE, $32.53) had a total return of -2.8% in 2020. However, so far in 2021, emerging markets are doing much better, with FNDE up 15.8%, exceeding both its benchmark index and category by 1,285 and 1,025 basis points, respectively.
The ETF tracks the performance of the Russell RAFI Emerging Markets Large Company Index. The index selects large-company stocks based on three fundamental measures of company size: adjusted sales, retained operating cash flow and dividends plus share repurchases.
FNDE currently has roughly 370 holdings, the top 10 of which account for 24% of the fund's assets. Those stocks include TaiTaiwan Semiconductor (TSM), Hon Hai Precision Industry (HNHPF) and Industrial and Commercial Bank of China (IDCBY). Like many emerging-market funds, it's most heavily weighted in China (25%), followed by Taiwan (18%) and Russia (13%). It's also extremely concentrated in financials and energy, which together make up about 47% of assets.
You also get an excellent yield among these 10 dividend ETFs, at 2.3%, which is nearly double the S&P 500's yield right now.
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Vanguard FTSE Developed Markets ETF
- Type: Foreign large-cap blend
- Assets under management: $103.6 billion
- Dividend yield: 2.4%
- Expenses: 0.05%
The Vanguard FTSE Developed Markets ETF (VEA, $52.70) is another one of the dividend ETFs featured here that you can tap for exposure to international stocks.
This fund tracks the FTSE Developed All Cap ex US Index, which invests in thousands of stocks across 24 developed markets, including Canada, European countries and Pacific-region nations. VEA itself holds roughly 4,048 stocks, the top 10 of which account for about 10% of total net assets – certainly large compared to the rest of its holdings, but a very thin concentration overall.
Although the prospectus states that the ETF invests in companies of all sizes, it is considered a foreign large-cap blend fund. The median market cap is $36.5 billion, with large caps making up more than three-quarters of the portfolio; small caps account for just 3.6% of assets. The top holdings include Samsung Electronics, Nestle (NSRGY) and ASML Holding (ASML). That concentration in blue-chip dividend payers gives the fund a yield of 2.4%, which is better than similarly constructed U.S. dividend ETFs.
While 54% of VEA's assets are dedicated to Europe, Japan is the top country weighting at 20.6%. The U.K. is the only other double-digit position at 13% of assets.
Owning VEA in combination with FNDE is an inexpensive way to cover the developed and emerging markets outside the U.S. For instance: A $7,500 investment in VEA combined with $2,500 in FNDE would result in annual fees of just $13.50.
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WisdomTree U.S. SmallCap Dividend Fund
- Type: Small-cap value
- Assets under management: $1.8 billion
- Dividend yield: 2.1%
- Expenses: 0.38%
Small-cap dividend stocks aren't the most common way to collect income, but that doesn't mean they're ineffective.
The WisdomTree U.S. SmallCap Dividend Fund (DES, $31.05) tracks the performance of the WisdomTree U.S. SmallCap Dividend Index, a fundamentally weighted index that is comprised of the smallest dividend payers from a broader WisdomTree index.
DES owns about 580 stocks, and its top 10 holdings – including cigarette and real estate holding company Vector Group (VGR) and B&G Foods (BGS), a branded food products company – account for just 13% of the portfolio's weight. And while 26% of the fund is financial stocks, it gives high weights to sectors that most of these other dividend ETFs haven't emphasized: 18% to industrials, 10% to real estate and 9% to materials.
The fund's holdings average about $1.8 billion in market value, though a few holdings are measured in the tens of millions of dollars. But it's the use of dividend weighting by WisdomTree, instead of assigning portfolio value simply by the size of the company, that makes DES such an attractive investment.
Each individual stock's weighting is calculated by dividing the sum of its regular dividends by the sum of the regular dividends for all the stocks in the index. This means if you have two companies with identical market values, the one paying out more dividend income would receive a greater weighting and therefore have more effect on DES's performance.
If you're totally committed to dividend investing, WisdomTree's approach is an interesting one not only for small-cap stocks, but stocks of all sizes.
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