Dividend Exchange Traded Funds (ETFs) are funds that focus on companies that pay dividends. These funds are preferred by income-focused investors who love their stability and regular payouts. A decade ago, funds focused on the strategy owned about $22 billion in assets. In 2020, they have grown to more than $250 billion. With interest rates at historic lows and with demand for passive income rising, these funds are likely to see growth. Let us look at the five best excellent dividend ETFs to invest in.
ProShares S&P 500 Dividend Aristocrats ETF (NOBL)
- Type: Diversified
- AUM: $5.7 billion.
- Dividend yield: 2.25%
- Expense ratio: 0.35%
Dividend aristocrats are companies in the S&P 500 index that have paid and increased dividends for 25 consecutive years. Most of the aristocrats are well-known firms like Walmart, Lowe’s, and PepsiCo. The firms have solid revenues, high income, a strong moat in their industries, and a healthy payout ratio. The ProShares S&P 500 Dividend Aristocrats tracks the S&P 500 Dividend Aristocrats Index and has returned more than 10.2% since its inception.
More than a quarter of the firms in the index are industrial giants like Illinois Tool Works (ITW) and Caterpillar. It is followed by consumer staples like Procter & Gamble (PG), and Materials. Its biggest holdings are Lowe’s, Carrier Global, Cintas, and Franklin Resources. Most importantly, the index is usually rebalanced four times each year at the start of every quarter. Also, the top ten holdings represent just 17% of the fund, meaning that each of the firms have similar weight.
To be clear, the fund does not offer a lot of growth. Furthermore, most of the firms it invests in are decades old. That is mostly because most of the fast-growing companies today are new tech firms that don’t pay a dividend. Still, it offers peace of mind and stability.
iShares Core U.S. REIT ETF (USRT)
- Type: Real Estate
- AUM: $1.4 billion
- Dividend yield: 3.94%
- Expense ratio: 0.08%
For starters, Real Estate Investment Trusts (REIT) are special firms that invest in property and other fixed and income-generating assets like forestland and data centres. The firms are required by law to distribute 90% of their net income to investors every year. As such, they are highly-popular among long-term income-focused investors. Therefore, investing in the iShares Core U.S REIT ETF gives you exposure to a diversified group of these firms. It tracks the FTSE NAREIT Equity REITs Index.
An important fact about the USRT is that its top three holdings are Prologis, Equinix, and Digital Realty Trust. These firms are well-known data centre REITs that provide services to some of the biggest firms in the world. They provide the infrastructure that firms like Alibaba, Amazon, Google, and Microsoft require to host their data centres. Other key holdings are Public Storage, Welltower, Realty Income, and Simon Property Group.
USRT has returned more than 3% since its inception in 2007. This underperformance is probably because some REITs have struggled as consumer behaviour changes. For example, mall REITs have suffered as more people shop at home while office REITs have been affected by the work-at-home phenomenon.
Invesco Preferred ETF (PGX)
- Type: Diversified
- AUM: $6.2 billion
- Expense ratio: 0.52%
- Dividend yield: 5%
Preferred stocks are special classes of corporate ownerships that give holders special priority in distributions. Warren Buffet’s deal with Occidental Petroleum is one of the best examples of how these shares work. He facilitated the firm’s acquisition of Anadarko and received preferential shares with an annual dividend yield of 8%.
The Invesco Preferred ETF tracks the ICE BofAML Core Plus Fixed Rate Preferred Securities Index. It invests at least 80% of its funds in dollar-preferential stocks. It has more than 300 holdings, with more than 64% of them being firms in the financial sector. Utilities, real estate, and communication firms make up about 30% of the entire portfolio.
For preferred shares, the credit rating is an important measure because it shows how strong a company is. 2% of the firms have a triple-A rating, while almost 60% of them have a BBB rating. Among the biggest holdings in the ETF are Citigroup, Wells Fargo, JP Morgan, Bank of America, and PNC Financial.
The PGX ETF is an ideal holding for long-term investors who are seeking stability by owning diverse preferential shares of quality firms.
SPDR Portfolio S&P 500 High Dividend ETF (SPYD)
- Type: Diversified large value
- AUM: $2 billion
- Expense ratio: 0.07%
- Dividend yield: 5.36%
The SPYD is a popular ETF that invests in the companies in the S&P 500 that have the highest dividend yield. Dividend yield measures the amount of money a firm pays through dividends in relative to its stock price. As such, high yielders usually have a weak-performing stock price. As a result, it has only returned about 3% since its inception. Instead, investors love it for the higher payouts. It tracks the S&P® 500 High Dividend Index.
The index has more than 80 constituent companies, with most of them being well-known dividend aristocrats and kings. Some of its key holdings are Legget & Platt, Xerox, Ventas, and Public Storage. 23% of the firms are in the financial sector, while 18.8% and 11% are in the real estate sectors. Only 9% of the firms are in the fast-growing technology sector.
Cost is a major reason why SPYD makes sense. The firm has an extremely low expense ratio of just 0.07%, which is significantly lower than that of comparable ETFs.
WisdomTree U.S. Total Dividend Fund (DTD)
- Type: Diversified
- AUM: $734 million
- Expense ratio: 0.28%
- Dividend yield: 2.74%
WisdomTree U.S Total Dividend Fund is an ETF that tracks the biggest dividend firms in the US. It tracks the WisdomTree U.S. Dividend Index.
20% of the constituent firms are in the technology sector, followed by financials, healthcare, and consumer staples. The top-ten firms in the ETF account for about 23% of the total fund. This includes firms like Apple, Microsoft, AT&T, and Johnson & Johnson. In total, because of its tech holdings, the fund has returned more than 180% since its inception.
This ETF is mostly ideal because of its long-term track record of performance and its low cost. Its expense ratio of just 0.28% is cheaper than that of its close peers like the Invesco Diversified Dividend Fund Class and First Trust Value Line Dividend ETF.
Dividend ETFs are great cash compounders, especially for investors with a long-term horizon. The regular dividends they provide can add up especially when re-invested. Before you invest in them, we recommend that you take time to study their composition, their yield, and their expense ratio.