The 3 Best ETFs for Dividends | Smart Switch: Personal Finance

(James Brunley)

If you want to have a little more exposure to income investments right now and a little less exposure to growth, you’re not alone. The recent breakdown of the market has not been exactly uniform; growth stocks have really taken it on the chin. And your settlement may not be over yet.

The good news is that it’s not too late to start shifting more of your portfolio into positions that pay dividends. You don’t even have to make any stock selections for this to happen. This trio of exchange-traded funds (ETFs) can get the job done in no time. Here’s a closer look at each.

iShares High Dividend Equity Fund

If your goal is to produce above-average dividend income right now, arguably your first stop should be the iShares High Dividend Equity Fund (NYSEMKT: HDV).

As its name suggests, this iShares fund seeks to maximize your payout by choosing stocks with superior dividend yields. However, that’s not to say that it simply tracks down the top-performing names on the market and stuffs them into a bucket that you can then buy a piece of. This fund is intended to mirror Morningstar’s Dividend Yield Focus Index, which limits its constituents to US stocks.

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The end result is a basket of 75 solid stocks that also pay above-average dividends. Among his main holdings at this time are names like AbbVie, JPMorgan ChaseY Verizonsupporting the fund’s current yield of around 3.2%.

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That may not sound like much; you can certainly find higher yields out there. But you’ll be hard-pressed to find better returns without giving up the solid blue chip status that all shares in this fund boast.

Vanguard Dividend Appreciation ETF

If you are more interested in long-term dividend growth than current income levels, consider the Vanguard Dividend Appreciation ETF (NYSEMKT: VIG).

Once again, the name says it all. The ETF is based on tickers that don’t necessarily generate a ton of regular quarterly income now, but instead have stocks that reliably increase their payouts over time. Microsoft is the main holding of this ETF right now, which pretty much represents the biggest premise here. Microsoft shares are valued at a premium, and while the company doesn’t prioritize dividends, it pays them. His priority is growth. As it happens, your dividend grows at the same rate as the company’s top and bottom lines.

And this ETF certainly accomplishes its goal. Last year’s total payouts of $2.66 per share were 46% better than what the fund was paying just five years ago, and nearly 90% stronger than the annualized dividend a decade ago.

The tradeoff is the performance you’re getting into. The current yield on the Vanguard Dividend Appreciation ETF is a modest 1.7%. That’s why it’s not an ETF to pick if you need good passive income right now. However, if you can afford to put some money in the fund now and wait five or 10 years, it will be worth it. In the meantime, you should get a respectable capital appreciation.

SPDR S&P 500 High Dividend ETF

Finally add the SPDR S&P 500 High Dividend ETF (NYSEMKT: SPYD) to your list of ETFs to consider if you’re looking to add passive income potential to your portfolio.

At first glance, it looks comparable to the aforementioned iShares High Dividend Equity Fund. And there is some overlap, to be sure. But there is more difference between the two than appears on the surface. The SPDR S&P 500 High Dividend ETF is arguably the most aggressive option, with the highest yield to prove it. The current dividend yield on this fund is 3.7%, reflecting the fact that the underlying index is more focused on stronger payouts and less on raw fiscal health.

It’s not like I’m buying junk. Valero Energy, cardinal healthand real estate investment trust iron mountain they’re three of the ETF’s 10 largest holdings right now, reflecting the S&P 500 High Dividend Index on which it’s based.

It’s a distinction that matters more than you think. The Morningstar Dividend Yield Focus Index, which serves as the basis for the iShares High Dividend Equity Fund, is fairly static, as companies that are fiscally healthy tend to remain fiscally healthy and therefore remain in the index. However, the S&P 500 High Dividend Index is rebalanced every six months to maintain the top 80 performing indices. S&P 500 names at that particular time. While this potentially leads to above-average taxable turnover, it also ensures that this ETF offers the highest return possible at any time among the three ETFs discussed here.

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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. James Brumley has no position in any of the stocks mentioned. The Motley Fool owns and recommends Iron Mountain, Microsoft, and Vanguard Dividend Appreciation ETFs. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.

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