Finding the best dividend exchange-traded fund (ETF) on the market can help optimize your portfolio’s performance to achieve the best risk-adjusted returns possible. But not all dividend ETFs use the same methodology. Dividend ETFs can be separated into high-dividend yield ETFs and dividend appreciation ETFs.
“While these two types of funds both track indices that focus on dividend-paying stocks, they can have somewhat different risk and return characteristics,” says Molly Concannon, principal and global head of equity product at Vanguard.
High-dividend yield ETFs typically track indexes focusing on stocks with the highest yields.
Dividend appreciation ETFs track indexes that focus on companies that reliably grow their dividends over time. “Such companies are likely to be high-quality firms with strong balance sheets and reliable cash flows,” Concannon says.
For our selection of best dividend ETFs, we screened multiple high-dividend yield ETFs and dividend appreciation ETFs based on factors such as management style, expense ratios, dividend yields, ratings, and assets under management (AUM). ETFs with high turnover rates and annual dividends of less than 1.75% didn’t make the cut.
Compare the best dividend ETFs
*Returns, dividend yields, expense ratios and AUM are sourced from Morningstar, current as of 4 p.m. EST on March. 1, 2023. The New York Stock Exchange, Nasdaq and bond markets were closed on March. 1, 2023, in observance of the federal holiday.
Why other dividend ETFs didn’t make the cut
We excluded actively managed dividend ETFs due to their higher expense ratios and a greater degree of complexity. For most investors, sticking to low-cost index ETFs is ideal, given that the majority of actively-managed ETFs tend to underperform their passive counterparts.
The rationale for this decision was based on the results of the SPIVA Scorecard from the S&P Dow Jones Indices. This scorecard measures the performance of actively managed funds worldwide against their index benchmarks. Regarding U.S. listed funds, 89.38% underperformed the S&P 500 as of June 30, 2022, over a trailing 15-year period.
That isn’t to say there is no use case for actively managed dividend ETFs. Some investors may prefer these ETFs for a chance at outperforming the market, generating higher income, or hedging risk. However, for most investors, a passively managed dividend ETF tracking an index likely offers the best bang for your buck.
Finally, this list excludes international dividend ETFs. While these ETFs can offer high yields and diversification, they come with higher expense ratios and lower tax efficiency than their U.S.-only counterparts. In addition, most of these ETFs did not achieve a sufficiently high Morningstar rating.
Methodology
Our curated rankings of the top dividend ETFs was created by screening a list of all available U.S. listed dividend ETFs based on the following “must-have” metrics:
- Morningstar rating. All of the ETFs selected have at least a 5-star rating from Morningstar. This is a quantitative, rearward-looking measure of an ETF’s historical performance.
- AUM. All the selected ETFs currently have at least $1 billion in assets under management. A higher AUM indicates greater investor confidence and interest in an ETF.
- 12-month dividend yield. All selected ETFs have a trailing 12-month yield of at least 1.75%, greater than the SPDR S&P 500 ETF (SPY). It is important to note that an ETF’s dividend yield can fluctuate, especially as its share price changes.
- Expense ratios. To be considered for this list, a dividend ETF must have a net expense ratio of less than 0.4%. All else being equal, a lower expense ratio means higher net returns for ETF investors.
- Management style. All ETFs on this list are passively managed by tracking a benchmark dividend stock index. None of the ETFs may engage in active stock-picking or utilize derivatives to enhance income or hedge risk.
This criteria allows investors to focus on dividend ETFs that have historically performed well, are currently popular, are managed by established firms with a proven track record, provide a higher yield than the market, are attractively priced relative to peers, and are managed passively with low fees.
An experienced ETF analyst selected the ETFs above, but they may not be right for your portfolio. Before purchasing any of these ETFs, do plenty of research to ensure they align with your financial goals and risk tolerance.
Final verdict
Dividend ETFs can be an excellent core holding in an income-oriented investment portfolio. Compared with picking individual dividend stocks, a dividend ETF offers greater simplicity, accessibility, and diversification.
Investors should focus on their strategies, holdings, and expense ratios when comparing dividend ETFs instead of solely chasing yields. Understanding the difference between U.S. and international holdings, high yields versus dividend growth, and equity styles will help you find the right ETF.
Our recommendation for the best overall dividend ETF is Vanguard High Dividend Yield (VYM). This ETF offers a combination of high diversification, a low expense ratio, a low turnover, and strong yields. It has high assets under management and is overseen by a highly reputable fund manager, Vanguard.
Frequently asked questions
A dividend ETF is a fund that holds a portfolio of different dividend stocks based on a methodology. Like stocks, dividend ETFs trade on an exchange throughout the day and can be purchased via various brokerage services. Dividend ETFs can be actively or passively managed and hold U.S. or international dividend stocks.
When considering what to look for in a dividend ETF, investors should go beyond assessing yields and also examine the ETF’s benchmark index, underlying holdings, expense ratio, historical volatility, and AUM. Investors should also consider the overall reputation of the ETF’s manager and determine if their investment philosophy aligns.
There is no “king” of dividend ETFs, per se. To qualify as a “dividend king,” a stock must have increased its dividends consecutively for at least the past 50 years. As of 2023, some ETFs may provide exposure to certain dividend-king stocks, but no ETF currently holds only dividend-king stocks.
Some ETFs focus solely on “dividend aristocrats.” These stocks have paid out and grown dividends for at least 25 consecutive years.
