The Best Dividend ETFs of January 2025
| Dividend ETFs | Dividend Yield |
|---|---|
| Vanguard International High Dividend Yield ETF (VYMI) | 4.45% |
| Invesco S&P 500 High Dividend Low Volatility ETF (SPHD) | 3.61% |
| WisdomTree U.S. SmallCap Dividend Fund (DES) | 2.85% |
| FCF International Quality ETF (TTAI) | 2.36% |
| Invesco High Yield Equity Dividend Achievers ETF (PEY) | 4.78% |
| Schwab U.S. Dividend Equity ETF (SCHD) | 3.41% |
| Fidelity High Dividend ETF (FDVV) | 2.90% |
Methodology
To compile this list, we began with a pool of high dividend-paying U.S. and international equity ETFs. We eliminated funds that invest in bonds, real estate investment trusts and certain other high-yielding asset classes.
Next, we banished ETFs with expense ratios higher than 0.67%. In general, lower fees boost returns. We also screened out funds whose dividend yields are below 2.67%.
Finally, we screened out newer funds that have been launched within three years. These steps pared our list to about 500 funds.
Our next step was to discard ETFs with Morningstar star rating below three. The research firm’s star ratings measure a fund’s risk-adjusted return, relative to open-end funds in the same category.
To make this list most attractive to the widest swath of investors, we barred niche sector funds and selected only broadly diversified U.S. and international high dividend equity funds. Fourteen funds made it through that screen.
The seven best equity dividend ETFs include a diverse list of fund families and strategies. One of our seven ETFs is actively managed. Many dividend funds hew towards value, but we also include funds with growth and momentum characteristics as well. You can be confident choosing any dividend ETFs from our list to round out a diversified investment portfolio.
What Is a Dividend ETF?
Dividend ETFs are exchange-traded funds that hold stocks with a strong history of paying dividends to their shareholders. When you own a dividend ETF, fund managers ensure the holdings are always ones that pay out good dividends.
Like any other exchange-traded fund, the managers of a dividend ETF choose a portfolio of stocks to match the composition of a dividend index. The resulting portfolio provides the holders with an inexpensive income-generating investment asset.
Dividend ETFs can be a more convenient way to pursue income investing than owning and managing your own basket of individual dividend stocks. Unlike the coupon payments on bonds, dividend payments are never guaranteed—that makes maintaining a portfolio of dividend stocks more labor intensive for individual investors.
How To Choose a Dividend ETF
Morningstar lists more than 130 dividend ETFs, making it imperative that you understand how to choose the right one for your portfolio. For example, two dividend funds might have a similar yield. But you might prefer the ETF, where dividends have historically grown at a faster rate.
When choosing a dividend ETF, you’ll want to be aware of:
- Dividend yield. Dividend yield is the percentage of the purchase price paid in dividends during the prior 12 months. If a $100 ETF pays $10 in dividends, it has a 10% dividend yield.
- Dividend growth. Just because a company pays a dividend now doesn’t mean it will continue in the future. Even if it keeps its dividend, there are no guarantee payouts will rise over time. That’s why some investors prefer buying into so-called dividend aristocrats. Companies in the S&P 500 have long histories of raising their dividends over time.
- Dividend quality. This applies to the quality and creditworthiness of the stocks owned by the ETF. If the fund owns riskier companies with lower credit ratings, then it’s more likely that the value of the fund will decline, taking your total return with it. As a general rule of thumb. avoid funds using riskier companies to boost yields.
The highest-yielding dividend ETFs may feature more volatile yields over time and less certainty of maintaining those yields. It’s not uncommon for the highest-yielding stocks to suffer greatly during market declines. That is why it’s important to consider current yield, dividend growth and quality.
Traditional dividend ETFs own companies that don’t grow as fast as the overall market. For this reason, investors need to understand the trade-off they might be making when seeking yield versus appreciation through rising stock prices.
If your goal is simply to earn the most with your money, you might opt for stocks positioned to grow in value more and then sell off shares as you need to for income.
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Types of Dividend ETFs
There are many categories of dividend ETFs, spanning index funds, regions and quality dividend stocks like the dividend aristocrats. Others focus on stock market sectors known for offering high yields, like REITs, utilities or on preferred stocks.
Below, we highlight some examples of leading dividend ETFs for each major category. Keep in mind that these are not endorsements of any particular fund. They’re just meant to highlight the types of funds you might research as you seek out the best dividend ETF for you.
- Diversified Dividend ETFs. High-dividend ETFs include companies that make higher than average dividend payments. Typically, companies that pay higher dividends might have greater risk profiles and may be subject to more price volatility.
- International Dividend ETFs. International dividend ETFs work much like their domestic high dividend counterparts; they simply invest in international companies instead of those based in the U.S. This kind of international exposure can further diversify your portfolio. Their dividend payments may be taxed at a higher rate than U.S. companies. Check with a tax professional if you intend to rely heavily on international dividend ETFs.
- Real Estate Dividend ETFs. Real estate investment trusts own shares of companies that buy or loan money to income-producing real estate. By law, REITs must pay 90% of their income to shareholders, making them top choices for those seeking rich dividend payouts.
- Dividend Aristocrat ETFs. Dividend aristocrats are the gold standard of dividend-paying stocks, making them a go-to for people looking for consistent, steady dividend income.
Dividends ETFs and Taxes
Dividend ETFs are taxed similarly to the underlying securities within the fund. Even if you reinvest dividends, they still count as taxable income. Most investors will receive tax forms, like a 1099-DIV, that explain whether their dividends are qualified or ordinary.
Qualified dividends are taxed at lower rates than ordinary income, such as long-term capital gains. They tend to come from U.S.-based companies. Ordinary dividends are taxed at your regular income tax rate. International companies are more likely to pay ordinary dividends.
Who Should Invest in Dividend ETFs?
Dividend ETFs may appeal to more conservative investors or income investors who would like to generate cash flow. Aggressive investors looking to maximize their total returns may be better served by growth ETFs, which provide the potential for higher capital gains.
In addition to income, dividend ETFs also provide the potential for capital appreciation. By investing in dividend-paying companies, these funds benefit from both earnings growth and dividend payments.
Dividend ETFs may also be a good option for investors who want exposure to a diversified portfolio of dividend-paying stocks but do not have the time or expertise to research and pick individual stocks themselves.
However, it’s important to note that dividend ETFs are not risk-free investments. Like any investment, dividend ETFs can be affected by market volatility and other factors. Additionally, companies can reduce or suspend their dividend payments at any time, which can impact the performance of the ETF.
Benefits of Investing in Dividend ETFs
Dividend ETFs offer a range of benefits, including:
- Diversification. Dividend ETFs own potentially hundreds of stocks and other securities, providing easy diversification and reducing the risk of exposure to individual assets.
- Low fees. ETFs typically have lower expense ratios than mutual funds or other investment vehicles, which can save investors money over time.
- Liquidity. Since dividend ETFs are traded on exchanges like individual stocks, it’s easy to buy and sell them. There’s typically a high level of demand for dividend funds, which makes them a highly liquid investment.
- Transparency. The investment companies that manage dividend ETFs are required to disclose their holdings on a daily basis, giving you plenty of transparency into the fund’s composition and strategy.
- Tax efficiency. ETFs are considered to be more tax-efficient than mutual funds because ETFs do not have to sell securities to satisfy redemptions, which can trigger capital gains taxes.
Overall, these benefits make dividend ETFs a good choice for income investors. However, it’s always important to do your own research and understand the risks before investing in any security.
Dividend ETF FAQs
What is a dividend?
Dividends are how companies distribute earnings to their shareholders. Dividend payments come in the form of cash or stock, and each share of stock you own may provide you with a specific dividend payout benefit.
Public companies are not required to pay dividends. Both private and public companies may pay dividends, they can decide whether to pay them monthly, quarterly or annually.
How are dividends taxed?
When it comes to taxation, there are two classes of dividends: qualified dividends and ordinary dividends. Qualified dividends are taxed under the capital gains tax rules, while ordinary dividends are taxed under the regular income tax rules.
Qualified dividends come from U.S. or foreign companies trading on major U.S. stock exchanges, or companies that trade in countries with a U.S. tax treaty. Ordinary dividends are issued by foreign companies that don’t meet qualified dividend criteria, or that come from savings or checking accounts, REITs, employee stock benefits or tax-exempt companies.
What is a dividend yield?
Dividend yield is how investors understand the relative value of a company’s dividend payments. To calculate dividend yield, divide a stock’s annual dividend amount by its current share price. Dividend yield is always conveyed as a percentage.
The dividend yield is a good way to compare the value of dividends offered by different companies. For example, a stock with higher quarterly dividends might seem enticing, but if the stock price is also high, it will pull down the overall dividend yield.
How do you calculate dividend yield?
Dividend yield is calculated by dividing the stock’s annual dividend amount by its current share price.
For example, consider a stock that’s currently trading at $10 per share, and that pays quarterly dividends of 10 cents per share. That’s a dividend of 40 cents for the year. To figure out the dividend yield for the stock, you divide 40 cents by $10 per share, giving you a dividend yield of 4%.
What does ex-dividend mean?
The ex-dividend date is the date by which you must own a dividend stock to be eligible to receive the payment. The ex-dividend date is important to know if you’re hoping to receive dividends from a stock as an investor.
The ex-dividend date is usually one business day before the company that issues the stock checks its stockholder roster to determine who is eligible for dividends. Buying shares of the stock on or after the ex-dividend date will disqualify you from receiving the dividend payment.
