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Dividends can be a powerful source of income. Some investors harness them by investing in dividend stocks, but there's another option for those who want to save time on stock research: high-dividend ETFs.
High-dividend ETFs may generate income
Dividend-paying ETFs can be a great tool for those looking to increase cash flow and diversify their investments. They offer a simple solution to getting exposure to a specific investing niche — in this case, stocks that pay a regular dividend.
You can use those dividends to pad your income as many retirees do. You can also reinvest those dividends back into the fund, to better take advantage of compound interest, and grow your investment portfolio. Whatever you choose, dividend-paying ETFs make it easy to add a large variety of investments to your portfolio all at once.
» Wondering about the taxes? Learn more about dividend tax rates.
7 high-dividend ETFs
Below is a list of five large-cap U.S. dividend ETFs, ordered by annual dividend yield. High dividend ETFs may come with higher risk. Always read the fine print and investigate dividends that seem too good to be true.
» Need a brokerage account? Check out the best online brokerages for dividend investing
Ticker | Company | Dividend Yield |
|---|---|---|
KBWY | Invesco KBW Premium Yield Equity REIT ETF | 8.78% |
XSHD | Invesco S&P SmallCap High Dividend Low Volatility ETF | 7.98% |
DIV | Global X SuperDividend U.S. ETF | 6.82% |
SPYD | SPDR Portfolio S&P 500 High Dividend ETF | 4.44% |
SPHD | Invesco S&P 500 High Dividend Low Volatility ETF | 4.15% |
LVHD | Franklin U.S. Low Volatility High Dividend Index ETF | 4.12% |
SDOG | ALPS Sector Dividend Dogs ETF | 4.09% |
Data current as of market close on May 31, 2024, and is for informational purposes only. Inverse, leveraged, actively managed and hedged ETFs are excluded, as are ETFs with expense ratios over 0.5%.
Can you live off ETF dividends?
While it is possible to live off ETF dividends, you'll need to do some careful planning to make it happen. You'll need to balance how much income your investments bring in, and how much you spend. You can use the 4% rule to help you figure out how much you can withdraw from your retirement stash, meaning you should aim to withdraw around 4% from your savings every year.
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If you want to live off ETF dividends you'll need to consider the money you may have from Social Security benefits, pension benefits, 401(k)s, IRAs, and any other sources of income. Then you can start to estimate how much you'll need to fill in the gaps with ETF dividends. If you're heading into retirement and want to see how ETF dividends can supplement your lifestyle, it may be a good idea to speak with a financial advisor.
» Interested in early retirement? Learn about the FIRE movement.
How to invest in dividend ETFs
A dividend ETF typically includes dozens, if not hundreds, of dividend stocks. That instantly provides you with diversification, which means greater safety for your payout. Even if a few of the fund’s stocks cut their dividends, the effect will be minimal on the fund’s overall dividend. A safe payout should be your top consideration in buying any dividend investment.
Here’s how to buy a dividend stock ETF:
1. Find a broadly diversified dividend ETF. You can typically find dividend ETFs by searching for them on your broker's website. (No broker? Here's how to open a brokerage account.)
Probably the safest choice is a low-cost fund that picks dividend stocks from the S&P 500 stock index. That offers a broadly diversified package of top U.S. companies.
2. Analyze the ETF. Make sure the ETF is invested in stocks (also called equities), not bonds. You’ll also want to check the following:
The dividend yield. This is how much a company pays out in dividends each year relative to its share price, and is usually expressed as a percentage.
5-year returns. Generally, higher is better.
Expense ratio. This is the ETF's annual fee, paid out of your investment in the fund. Look for an expense ratio that is under 0.50%, but lower is better.
Stock size. Dividend ETFs can be invested in companies with large, medium or small capitalization (referred to as large caps, mid caps and small caps). Large caps are generally the safest, while small caps are the riskiest.
Assets under management (AUM). This refers to the total market value of the assets a fund manages. The AUM gives an indication of the size of the fund. Funds with a low AUM promising high dividends may be risky.
3. Buy the ETF. You can buy ETFs just like you’d buy a stock, through an online broker. A good approach is to buy them regularly, to take advantage of dollar-cost averaging.
Track your finances all in one place
Find ways to invest more by tracking your income and net worth on NerdWallet.
Learn more about sector ETFs:
How to choose the right biotech ETFs for you
Why gold ETFs are having a record year
What Is a Dividend and How Do They Work?
Invest abroad? Check out China ETFs
Data is intended for informational purposes only.
Neither the author nor editor held positions in the aforementioned investments at the time of publication.
