It cannot be overstated how crucial dividends can be to an investor’s total return, especially when reinvested. From 1960 to 2021, reinvested dividends have represented 84% of the total return of the S&P500according to Hartford Funds.
In other words, dividends can be powerful. If you’re looking to invest in dividend-paying stocks, look no further than dividend-focused exchange-traded funds (ETFs).
ETFs that prioritize dividends can offer the advantage of having higher dividend yields as well as diversification, one of the main pillars of investing. Here are three top-notch dividend ETFs to check out.
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1. Vanguard High Dividend Yield ETF
The Vanguard High Dividend Yield ETF (NYSEMKT: VYM) is a popular option with a fairly broad approach to the stocks it holds. Excluding REITs, the fund consists of 443 US public companies that have paid above-average dividends over the past 12 months. With the Vanguard High Dividend Yield ETF, investors will gain exposure to large cap companies spanning all 11 sectors. And because it’s weighted by market capitalization, larger companies make up the bulk of the fund.
A great thing about this ETF is its low cost with an expense ratio of just 0.06%. A small difference in percentages may seem small on paper, but higher expense ratios can erode your returns over time. With 12-month payouts of $3.20 per share (or a 3.0% return at the time of this writing), it’s also in line with some top-paying dividend ETFs.
2. SPDR S&P Dividend ETF
The SPDR S&P Dividend ETF (NYSEMKT:SDY) is a bit more selective in the stocks it includes, only selecting companies that have consistently increased their dividends for at least 20 consecutive years. Although that’s five years less than it takes to achieve the title of dividend aristocrat, this ETF still consists of a large number of them, offering a little more reliability.
The index is weighted by dividend yield, so the higher a company’s yield, the greater its representation in the fund. There are only 119 companies in total, but the largest holding company, Franklin Resources, represents only 1.85%. Fund companies are selected each January and reweighted quarterly.
The fund has paid out $3.35 over the past year (about a 2.7% return). However, one of the downsides of the SPDR S&P Dividend ETF is its expense ratio, which is a bit more expensive than other options at 0.35%.
3. iShares Core High Dividend ETF
The iShares Core High Dividend ETF (NYSEMKT:HDV) is the most selective of the three listed here, holding just 75 US stocks that the fund has reviewed for financial health. This ETF consists mostly of large cap stocks, and it is a bit heavier than other ETFs with the top three holdings – ExxonMobil, Johnson & Johnsonand Chevron — constituting more than 19% of the fund. The top three sectors – healthcare, energy and consumer staples – also make up around 58% of the fund.
With a payout of $3.16 over 12 months (or a return of 3.1%), this can be a lucrative choice for investors looking to kill two birds with one stone with dividends and large-cap investments. . It is also inexpensive with an expense ratio of 0.08%.
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Stefon Walters has no position in the stocks mentioned. The Motley Fool has positions in and recommends Vanguard High Dividend Yield ETF. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.