Dividend-paying stocks provide shareholders the opportunity to create a passive income stream at a low cost. To identify the best dividend stocks, it's crucial for investors to focus on companies with predictable earnings, strong balance sheets, and a sustainable payout ratio - allowing them to pay, maintain, and even increase dividends across market cycles.
In 2023, dividend stocks lagged behind the broader markets, as higher interest rates and rising bond yields made alternative investments more attractive to investors seeking lower-risk, high-return assets. But with three potential interest-rate cuts on the table for 2024, dividend stocks are poised to make a comeback.
Alternatively, investors can consider buying dividend-themed exchange-traded funds (ETF), which can help to provide diversification and lower overall risk. Here are the three best dividend ETFs to buy for passive income.
Schwab US Dividend Equity ETF
The Schwab US Dividend Equity ETF (SCHD) is among the most popular ETFs on Wall Street. It aims to track the total return of the Dow Jones U.S. Dividend 100 Index, offering investors an easy-to-access passive income stream.
With $52.4 billion in assets under management, the SCHD ETF holds 104 stocks - but no real estate investment trusts (REITs). It has an expense ratio of 0.06%, which is very low, and offers a dividend yield of 3.5%. Moreover, these payments have increased by 16.4% annually since 2011, which is quite exceptional. In the last 10 years, the SCHD ETF has returned 190% after adjusting for dividends. In this period, the S&P 500 Index ($SPX) has returned 210%.
The top equity holdings of SCHD include companies such as Broadcom (AVGO), Texas Instruments (TXN), AbbVie (ABBV), Home Depot (HD), and Amgen (AMGN), which together account for 21% of the ETF.
Vanguard High Dividend Yield ETF
The Vanguard High Dividend Yield ETF (VYM) seeks to track the performance of the FTSE High Dividend Yield Index, which measures the investment returns of companies characterized by high dividend yields. It provides a convenient way to gain exposure to high dividend-yield companies across multiple sectors.
With over $51 billion in assets under management, the VYM ETF holds 450 stocks. It has an expense ratio of 0.06% and offers a dividend yield of 3.11%. Moreover, these payments have increased by 11.6% annually in the last 17 years, enhancing the effective yield over time.
In the last 10 years, the VYM ETF has returned 150% after adjusting for dividends. Since its inception in late 2006, it has gained 283% compared to the S&P 500's gains of 377.5%.
The top holdings of the fund include Exxon Mobil (XOM), JPMorgan Chase (JPM), Johnson & Johnson (JNJ), Procter & Gamble (PG), and Broadcom, which collectively account for 15% of the ETF.
SPDR Portfolio S&P 500 High Dividend ETF
The final dividend ETF on my list is the SPDR Portfolio S&P 500 High Dividend ETF (SPYD). It tracks an index of the 80 highest-yielding stocks from the S&P 500 Index. These stocks are equally weighted, providing investors with exposure to some of the largest companies in the world.
With $6.9 billion in assets under management, the SPYD ETF holds 80 stocks. It has an expense ratio of 0.07% and offers a dividend yield of 4.9%. Moreover, these payments have increased by 6% annually since 2015.
Since its launch in 2015, the SPYD ETF has returned 93% after adjusting for dividends, compared to the S&P 500 gains of 171.4%. Notably, the SPYD ETF offers the highest yield, but has lagged the S&P 500 returns by a wide margin compared to the other two dividend ETFs.
The top holdings of the fund include Seagate (STX), NRG Energy (NRG), Philips 66 (PSX), Amgen, and KeyCorp (KEY), which account for 8.2% of the ETF.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
