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The Top 5 Dividend ETFs

investment moneyDividend-paying stocks have outperformed non-payers over the long haul. That is just one of the reasons why investors seem to prefer dividend paying stocks. Another reason we all have is the need for income. Dividend stocks seem to offer the best of both worlds—the upside potential of stock growth along with the steady stream of income like a bond. Unlike a bond however, companies have no contractual obligation to pay dividends. In fact, those stocks with the highest dividend yields are often the riskiest and likely facing a dividend cut or moribund growth prospects.

Always be aware of your need for diversification and remember that the risk of picking individual dividend paying stocks is very high. For income growth and asset protection investors should consider a dividend-themed ETF. There are a large number of dividend ETFs to choose from and this article highlights five of the best as we head into the summer of 2016. Each of these funds come with the low expense ratio that you would expect from an ETF and each use some sort of screen to separate the wheat from the chaff among dividend paying stocks.

Vanguard Dividend Appreciation ETF VIG

This popular Vanguard ETF VIG fund selects stocks that have increased their dividend for at least ten consecutive years. Stocks that are able to consistently raise dividends typically have strong brands, efficient scale or a monopolistic market position, such as Coca-Cola, CVS or Medtronic, each of which are top ten holdings in this fund. At $20 billion in assets the fund is perhaps too large. Small size is important for equity funds so that they are not forced to own too large a position in any one individual stock. However, the fund market cap weights its holdings, so that smaller stocks make up only a smaller portion of the fund.

This ETF charges just 0.10%, that is $10 for every $10,000 invested and yields 2.2%. That is a lower yield than the other ETFs on this list, but the hope with these companies is that the dividends will grow, as they have over the past ten years. Information on the Vanguard ETF VIG fund can be found here.

Schwab U.S. Dividend Equity ETF SCHD

The Schwab ETF SCHD fund starts with the largest 2,500 U.S. stocks and eliminates the half with the lowest yield. The remaining stocks are ranked based on dividend yield, cash flow to debt, dividend per share growth and return on equity. The ETF selects the top 100 stocks based on these four metrics. The result is a high yielding portfolio that does not skimp on quality because quality companies typically have good dividend growth, a high return on equity and low debt. At only .07%, this is the cheapest ETF on this list. It currently yields 2.9%. Get more information on Charles Schwab ETFs here.

iShares High Dividend ETF HDV

iShares High Dividend ETF is somewhat of a misnomer, because it is not seeking out the highest yielding stocks per se. Instead, it seeks out companies that are rated as having a “moat”, a qualitative assessment of a firm’s competitive economic advantage, and have a low risk of default, a quantitative measure of a firm’s debt and volatility. Stocks that meet these two criteria are ranked by dividend yield and the top 75 stocks are included in the ETF. The fund charges just 0.12% and recently had a yield of 3.6%. More information on the iShares HDV fund can be found here.

Vanguard High Dividend Yield ETF VYM

Yes, Vanguard has two ETF funds on this list. Whereas VIG tilts to quality and growth, VYM tilts toward higher yielding, value stocks. It sorts all dividend paying stocks by yield and selects the top half. This may sound like a risky approach, given that higher yielding stocks are typically riskier. However, the ETF market cap weights its holdings, so large cap dividend payers make up the majority of assets, as opposed to higher yielding mid and small cap companies. The fund recently had 427 stocks, much more than the 185 stocks in VIG. This diversification is important because the ETF does not screen for quality. The ETF charges just 0.09% and recently had a yield of 3.1%. Check Vanguard’s ETF VYM fund here.

WisdomTree Total Dividend ETF DTD

WisdomTree takes an elegant approach to dividends. It weights all U.S. stocks by the dollar amount of dividends paid. This results in a skew to large-cap value companies. Large companies pay the largest dividends in terms of total dollars and value companies tend to pay more than growth companies, which retain more earnings to invest for future growth. What is interesting about this approach compared to SCHD or HDV, is that it does not set an arbitrary limit on the number of stocks it owns or an arbitrary number of years that a company must have paid a dividend, like VIG does.

What Wisdom Tree does Instead is to include all companies to the extent that they pay a dividend and weights them in proportion to dividends paid. It is important to understand that this ETF weights by total dollars paid and not by yield. If it weighted by yield, riskier companies might rise to the top. At 0.28%, this is the most expensive ETF on this list and it recently had a yield of 2.8%. Information on the WisdomTree Total Dividend ETF DTD can be found here.

The Top Five Dividend ETFs Conclusion

If you going to buy stocks or ETFs you need to look at the added benefit of yearly dividend growth. For most investors, dividends and growth is the right decision for a long term investment strategy. Yearly dividends and long term growth potential make looking at these top five dividend ETFs a strategic move.