Top-Performing Dividend Exchange-Traded Funds for February 2025
Dividend stocks might just be the unsung heroes of wealth accumulation. Whether you're aiming for a steady income stream, owning shares in top-notch companies that will only increase in value, or a bit of both, dividend stocks are your ticket. However, choosing the finest individual dividend stocks can be a daunting task. This is where dividend exchange-traded funds (ETFs) enter the scene, acting as the knight in shining armor.
ETFs, short for exchange-traded funds, allow you to buy into entire groups of stocks at once. This feature offers an excellent method to gain exposure to specific investment ideas, such as entire indexes like the S&P 500, specific sectors – like healthcare or tech stocks – or even specific characteristics such as dividend-paying stocks. When you purchase shares of an ETF, you're effectively purchasing a small piece of all the stocks in the fund, gaining immediate diversification and building a customized stock portfolio tailored to your financial goals.
To pinpoint the perfect ETF for your objectives, it's essential to define what you're trying to achieve. In the following sections, we'll delve into four top-notch dividend ETFs, each with distinct qualities. Whether you're after a high dividend yield, dividend growth, stability, or maximum returns, you'll find something to your liking.
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When companies generate a profit, they have three options: reinvest the money in the business, save it for future use, or return it to investors through dividends or share buybacks. History has shown us that the companies with robust economic moats consistently generate profits, leaving them with a surplus to reward shareholders through rising dividends year after year. These dividend growth stocks stand out from the pack.
Two of our preferred dividend ETFs this year cater to this niche divide: The Vanguard Dividend Appreciation ETF (VIG – 0.38%) and the iShares Core Dividend Growth ETF (DGRO – 0.41%).
Let's start with the Vanguard Dividend Appreciation ETF, the industry humongous Vanguard's flagship dividend fund. The fund tracks the S&P U.S. Dividend Growers Index, consisting of U.S. stocks with ten years of dividend growth, and boasts a minimal expense ratio of 0.06%, making it one of the lowest-cost dividend ETFs on the market. However, its yield of around 1.6% at market price in late 2024 is on the lower side.
The Vanguard ETF's strength lies in its impressive dividend growth. Over the past decade, the ETF has increased its dividends by more than 80% and delivered a total return of approximately 200%. Although it has trailed the wider S&P 500 index in terms of overall returns during periods when non-dividend-paying growth stocks ruled the roost, the gap has narrowed as interest rates have lowered tech and growth stock valuations.
The iShares Core Dividend Growth ETF is another viable option with similar low-cost structure, an expense ratio of 0.08%, and a higher yield of around 2.2%, although still not a high yield. This ETF, managed by industry titan BlackRock, follows the Morningstar US Dividend Growth Index and has performed similarly to the Vanguard fund in terms of overall returns over the past decade. With a total return of about 210%, it has matched or slightly surpassed the S&P 500's ratio of around 260% in the same time period.
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If you're gunning for a higher yield, the Schwab U.S. Dividend Equity ETF (SCHD – 0.21%) might be more your speed with its 3.7% yield at recent prices. This yield combined with other attractive qualities makes it a compelling choice for dividend ETF investors.
Like the previous two ETFs, the Schwab U.S. Dividend Equity ETF features a reduced expense ratio of 0.06%, a long record of dividend growth in most years, and a focus on U.S. companies, many of which have a history of dividend growth.
However, there are certain key differences between the companies it targets compared to the growth dividend ETFs we discussed earlier. This ETF tracks the Dow Jones U.S. Dividend 100 Index, which, according to S&P Global, looks for companies with strong financial ratios, high yields, and a history of paying – not necessarily increasing – dividends. As a result, companies that lower dividends temporarily or don't raise dividends year-to-year may remain part of the Dividend 100 Index and this ETF.
Since its inception in 2011, the Schwab U.S. Dividend Equity ETF has delivered a total return of over 400%. If you're searching for an above-average yield with strong total returns, this ETF should certainly be on your radar.
Broaden your horizons by exploring various dividend-focused ETFs. Discover which one best aligns with your financial goals and investment strategy. In no time, you'll be well on your way to building a solid income stream and capital gains. Happy investing!
- Investing in dividend exchange-traded funds (ETFs) can be an effective strategy to gain exposure to dividend-paying stocks, providing immediate diversification and helping build a customized portfolio tailored to financial goals.
- Two popular dividend ETFs for investors seeking dividend growth are the Vanguard Dividend Appreciation ETF (VIG) and the iShares Core Dividend Growth ETF (DGRO). Both funds have low expense ratios and have delivered strong total returns over the past decade.
- For investors seeking a higher yield, the Schwab U.S. Dividend Equity ETF (SCHD) might be a better option, with a yield of 3.7% and a strong total return since its inception in 2011. The ETF targets companies with strong financial ratios, high yields, and a history of paying dividends.
- As the situation in Ukraine continues to evolve, it's crucial for investors to keep an eye on how geopolitical events may impact their investment portfolios, including their dividend ETF holdings. Diversification can help mitigate potential risks and ensure a balanced investment strategy.
