Are Dividend ETFs Worth It for Long-Term Investors

Dividend ETFs can be a great option for long-term investors. They offer a way to invest in a diversified portfolio of dividend-paying stocks, providing a relatively stable source of income.

Investors can choose from a wide range of dividend ETFs, each with its own unique characteristics and investment strategies. Some popular options include Vanguard Dividend Appreciation ETF and iShares Core S&P U.S. Dividend Aristocrats ETF.

A key benefit of dividend ETFs is their ability to provide a regular income stream. According to the article, dividend ETFs can offer a dividend yield of around 3-4% per year, which can be attractive to investors seeking relatively stable returns.

If you're considering investing in dividend ETFs, you have several options to choose from. The SPDR S&P Dividend ETF (SDY) is a mid-cap value ETF with $21.6 billion in assets under management and a dividend yield of 2.3%. It tracks the S&P High Yield Dividend Aristocrats Index, which includes large-, mid-, and small-cap stocks with 25 years of consecutive dividend hikes.

The Vanguard High Dividend Yield ETF (VYM) is another popular option, with $58.9 billion in assets under management and a dividend yield of 2.7%. It tracks the FTSE High Dividend Yield Index, which excludes REITs and focuses on above-average-yielding stocks.

For a more international approach, the Vanguard International Dividend Appreciation ETF (VIGI) is a foreign large growth ETF with $7.2 billion in assets under management and a dividend yield of 2.0%. It tracks the S&P Global Ex-U.S. Dividend Growers Index, which selects companies with seven or more consecutive years of dividend growth.

Here are some key statistics for these ETFs:

These ETFs offer a range of investment options for those seeking dividend income.

The SPDR S&P Dividend ETF (SDY) is a solid choice for investors seeking a mix of dividend yield and growth. It tracks the S&P High Yield Dividend Aristocrats Index, which includes large-, mid-, and small-cap stocks with 25 years of consecutive dividend hikes.

This ETF has a dual focus that sets it apart from others in the market. While many dividend growth stocks offer yields comparable to or less than the market, SDY's dual focus on both above-average yield and dividend growth provides a unique combination.

SDY is invested in the market's most disciplined dividend stocks, resulting in a high-quality portfolio. The fund's sector allocation is somewhat lopsided, with consumer staples making up 18.1% of the portfolio, industrial stocks accounting for 18.2%, and utility stocks garnering 16.2%.

Here's a breakdown of the top holdings in SDY:

SDY's dual focus on dividend yield and growth makes it an attractive option for investors seeking a more attractive risk/reward profile than the Russell 1000 Value Index.

If you're looking for a higher income from your dividend ETF, there are options available.

One such option is the SPDR Portfolio S&P 500 High Dividend ETF (SPYD), which has a yield of 4.7%. This is significantly higher than the 2.5% yield of the ProShares S&P 500 Dividend Aristocrats ETF (NOBL).

SPYD has a very low annual expense ratio of 0.07%, making it an attractive choice for value and income investors.

The top five holdings of SPYD are Iron Mountain (IRM), Public Services Enterprise Group (PEG), Williams Cos. (WMB), Hasbro (HAS), and International Paper (IP), none of which are Dividend Aristocrats.

Here are the key statistics of the two high-yielding dividend ETFs:

Keep in mind that while SPYD offers a higher yield, its holdings may not be as diversified or of the same quality as those of NOBL.

Dividend ETFs can provide consistent payouts, but not all of them are created equal. Some high-dividend yield ETFs hold stocks with shaky business conditions and fading profits.

High-yielding dividend ETFs face two related risks: they may not grow at a reasonable rate over the long term, and they may be subject to deeper drawdowns. This compromises their long-term growth and increases volatility.

Investors should favor dividend ETFs with reasonably higher yields than the market that intentionally control their exposure to unstable companies.

Most dividend ETFs have a track record of paying out qualified dividends, which are taxed at a lower rate than non-qualified dividends.

The theory behind stock buybacks is that the price of the stock should rise after the buyback, giving shareholders the option to sell on their own terms.

This approach can be beneficial for investors, as it doesn't create a taxable event like dividend payments do.

Dividend investors tend to focus on funds that have a high percentage of qualified dividend income, which can help minimize tax liabilities.

Some investors may want to avoid companies that pay dividends and instead opt for those that do buybacks, as it doesn't create a taxable event.

The trailing yield of an ETF can fluctuate wildly, as seen in the JPMorgan Equity Premium Income ETF, which had a trailing 12-month yield as low as 6.6% at the end of 2021.

Large swings in income are a hallmark of covered-call ETFs, with the JPMorgan Equity Premium Income ETF's monthly distributions ranging from about $0.26 to $0.62 per share.

The income from these ETFs is the highest, but it comes with a price: the underlying portfolio won't grow by much.

Bond ETFs, on the other hand, are great for income investors who want to preserve wealth or cut back on risk, with stable yields that don't fluctuate as much.

The JPMorgan Equity Premium Income ETF's yield can double in a short period of time, as it did from 6.6% to almost 12% in just 14 months.

Dividend ETFs can be a good fit for long-term investors with a moderate risk tolerance, as they often provide a relatively stable source of income and the potential for long-term growth.

Some dividend ETFs focus on specific sectors, such as real estate or healthcare, which can be a good option for investors who want to diversify their portfolio by investing in a particular industry.

In contrast, others track a broad market index, which can be a good choice for investors who want to spread their risk across many different companies.

Dividend ETFs can provide a sense of stability and psychological comfort that's hard to find in other investment options.

There are two primary reasons why you might consider owning dividend ETFs – stability and psychological comfort.

Dividend ETFs can offer a consistent payout, which can be a welcome relief during market downturns when stock prices are crashing.

In fact, stock dividends tend to decline by less than stock prices during market crises, making it easier to hold onto your shares.

This can be a big psychological advantage, especially when prices are plummeting.

The WisdomTree Emerging Markets High Dividend Fund (DEM) is a great example of a dividend ETF that can provide high yields, but its dividends aren't always consistent.

DEM tracks the WisdomTree Emerging Markets High Dividend Index, which selects the highest 30% of emerging market stocks by dividend yield and weights them by annual cash dividends paid.

Here's a breakdown of DEM's top holdings:

As you can see, DEM's top holdings are a mix of large-cap and mid-cap stocks from emerging markets.

While DEM's dividends may not be as consistent as those found in the US, its yields are still significantly higher than most stock funds.

In fact, DEM's dividend yield has ranged from 5% to 7% in the past, making it an attractive option for income-seeking investors.

Investing in dividend stocks can be a great way to generate income, but it's essential to understand the potential consequences of sector concentration.

Loading up on dividend stocks or ETFs inherently positions your portfolio in sectors that tend to pay the most dividends, such as utilities and real estate.

This means you're making a bet on these sectors, which may not be a bad thing if you're okay with it, but it's crucial to be aware of the trade-off.

Dividend investors often chase after dividend income without realizing how they're re-positioning their portfolio in the process.

The U.S. stock market's composition has changed, making dividend paying stocks fundamentally different from non-dividend paying stocks today.

Dividend ETFs offer several advantages that can be beneficial for investors. Diversification is a key benefit, as it minimizes the risk of losing money if a single stock performs poorly.

A diversified ETF can also provide a higher yield potential compared to individual stocks. This is because some ETFs use covered calls to generate more income from their holdings.

Some discount brokers offer free ETF fees, making it a cost-effective option for investors. This can save you money on transactions, allowing you to reinvest in your portfolio.

Diversification is a key advantage of dividend ETFs. By investing in an ETF, you're spreading your risk across a broad range of stocks, which can help minimize losses if one of the underlying stocks performs poorly.

Higher yields are possible with some dividend ETFs, thanks to the use of covered calls to generate additional income from the holdings.

Free ETF fees can be a significant cost savings, especially for frequent traders. Some discount brokers offer no-fee transactions on ETF trades, which can add up to a lot of money over time.

A diversified ETF is less likely to go to zero, unlike a single stock that can completely fail. This is because an ETF's value is based on the aggregated performance of its underlying stocks, making it a more stable investment.

Here are some key pros of dividend ETFs at a glance:

When investing in dividend ETFs, it's essential to consider the potential drawbacks. One of the main cons is that you won't have access to discounted DRIPs, which can be a significant advantage for individual dividend stocks.

Individual dividend stocks often offer dividend reinvestment plans (DRIPs) that allow you to buy new shares at a discount using the dividends paid out. In contrast, dividend ETFs only offer synthetic DRIPs through a discount broker.

A blended yield is another con of dividend ETFs. This means that the yield you receive will be a mix of the yields from the underlying stocks, bonds, or other investment vehicles in the ETF.

As a result, you may end up with a distribution with various tax treatments, which can be confusing for tax tracking. This is because individual dividend stocks can support the tax credit by paying a dividend, but an ETF bundle can do many trades to provide income, resulting in a distribution with different tax implications.

Here are some key differences to keep in mind:

If you're seeking a consistent income stream, particularly in retirement, dividend ETFs can be a valuable part of your portfolio. You can technically re-create an income stream of non-dividend paying ETFs by selling them down each quarter, but some people don't like the idea of selling down their portfolio.

Those who are more risk-averse may find comfort in the stability that dividend-paying stocks tend to offer, especially during volatile market periods. I've seen many investors who prefer to play it safe with their investments.

There is a certain level of psychological comfort that dividends can provide (outside of their stability). If you find yourself liking the idea of getting quarterly payouts from your portfolio, then dividend-focused ETFs might be right for you.

Here are some specific groups who may benefit from dividend ETFs:

If you're looking for a consistent income stream, particularly in retirement, dividend ETFs can be a valuable part of your portfolio. You can technically re-create an income stream of non-dividend paying ETFs by selling them down each quarter, but some people don’t like the idea of selling down their portfolio.

Investors who are more risk-averse may find comfort in the stability that dividend-paying stocks tend to offer. This is especially true during volatile market periods.

There's a certain level of psychological comfort that dividends can provide. If you find yourself liking the idea of getting quarterly payouts from your portfolio, then dividend-focused ETFs might be right for you.

Here are the types of investors who might benefit from dividend ETFs:

If you're considering dividend ETFs, there are certain types of investors who might want to think twice. Growth-Oriented Investors might be better off with growth-focused ETFs, as their primary goal is capital appreciation, not income.

Investors in Higher Tax Brackets should also be cautious. Dividend-focused ETFs can be less tax efficient compared to stock buybacks, which can result in higher tax liabilities.

If you're seeking maximum diversification, you might want to avoid dividend ETFs. They can have sector concentration risks, particularly within utilities and real estate.

Here are some groups to consider avoiding dividend ETFs:

Dividend ETFs can be a great option for those who want to simplify the process of buying dividend growth stocks, but it's essential to understand the trade-offs. They offer instant diversification benefits, but come with annual fees that reduce shareholder returns.

Investing in individual stocks requires thorough research, but it can also provide higher yields than many ETFs. This is particularly true for high-quality dividend growth stocks like the Dividend Aristocrats and Dividend Kings, which have raised dividends for 50+ years.

Some ETFs, like NOBL, allow investors to invest in all the Dividend Aristocrats at once, making it a convenient option. However, it's crucial to weigh the benefits against the costs.

Investors looking for high yields may find SPYD to be an appealing choice, but it's essential to consider the fees and potential returns before making a decision.