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Dividend stocks are getting some investor attention these days as tech stocks move into a bear market, and ETFs can offer a great path for building a diversified dividend stock portfolio. The ETF universe consists of thousands of funds, many providing different approaches to generating returns that can fill various roles in your portfolio.
Let’s take a closer look at four of these ETFs that have a reputation for delivering dividend income, even though they might do so using different methodologies.
1. Vanguard High Dividend Yield ETF
The Vanguard High Dividend Yield ETF (NYSEMKT: VYM) is one of the most popular dividend-focused ETFs on the market. It has a relatively simple and conservative approach, but it still results in great diversification with high yield.
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The fund selects stocks based on forecast dividends over the next year, and it takes the top half out of roughly 1,000 candidate stocks. The resulting allocation is around 450 stocks right now, and the portfolio is market-cap weighted. This means that larger companies make up a disproportionate amount of the fund’s holdings, and it more closely tracks major indexes. It also excludes real estate investment trusts (REITs).
The fund delivers an attractive 2.77% distribution yield (the ETF version of a dividend yield), which is fairly high for a diversified portfolio in today’s market. As with other popular Vanguard products, this ETF scores major points with its super-low 0.06% expense ratio. That means that costs won’t eat into returns. Its high trading volume results in excellent liquidity and low trading costs, which are great benefits for shareholders as well.
While this is a relatively straightforward approach, investors should understand that the dividend focus results in relatively high exposure to financial, healthcare, and consumer staples sectors.
VYM, REGL, TDIV, SDY Total Return Level data by YCharts
2. SPDR S&P Dividend ETF
The SPDR S&P Dividend ETF (NYSEMKT: SDY) is another very popular fund that takes a slightly different approach. The selection methodology is more stringent, with the management team running screens to identify sustainable high yields. That involves growth consistency, payout ratio, earnings quality, and other factors. The stocks that pass those screens are then weighted on yield, rather than market cap, which leads to heavier exposure to smaller companies. The candidate universe also includes REITs. The ETF currently holds around 120 stocks.
Investors will enjoy the resulting 2.6% distribution yield. This fund also has great liquidity and low trading costs. However, the more active selection methodology results in a 0.35% expense ratio. That’s not exceptionally high, but it does impact net returns each year.
3. First Trust Nasdaq Technology Dividend Index Fund
The First Trust Nasdaq Technology Dividend Index Fund (NASDAQ: TDIV) is another reputable dividend fund that brings a meaningfully different approach. This ETF has a more limited scope, and it seeks to build a portfolio of 100 telecom and tech stocks that are listed on U.S. exchanges. It’s weighted by dividend yield so that a handful of established giants don’t dominate the allocation. This approach results in a fairly unique composition — most dividend funds aren’t tech-heavy, and most popular tech stocks don’t pay high yields.
That composition has resulted in a respectable 2.07% distribution yield, but it also creates higher volatility. The price fluctuations of the First Trust Nasdaq Technology Dividend Index Fund are somewhat more extreme than those of other popular dividend ETFs, which leads to both larger returns in bull markets and steeper losses in bear markets. It also has a 0.5% expense ratio, which is well above those of the cheapest peers. These features make it a more specific fit that is great for some investors and poor for others.
4. ProShares S&P MidCap 400 Dividend Aristocrats ETF
The ProShares S&P MidCap 400 Dividend Aristocrats ETF (NYSEMKT: REGL) is an interesting fund for investors who are looking to limit large-cap exposure. That can be especially valuable for index investors who have seen their wealth tied up in a smaller number of huge companies that are dominating the market.
The ETF only holds stocks that have increased their dividends for 15 consecutive years. The fund aims to hold at least 40 stocks, which are equally weighted. It also caps sector exposure at 30% of the total allocation. This forces the fund to be flexible with its criteria in some cases, but the overall portfolio is still comprised of relatively stable dividend payers.
Investors should be pleased with the 2.65% distribution yield. The 0.41% expense ratio is somewhat high, but it’s not an absurd price to pay for investors who want this sort of mid-cap exposure.
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Ryan Downie has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard High Dividend Yield ETF. The Motley Fool has a disclosure policy.
