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Exchange-traded funds, or ETFs, can serve as a starting point for finding the perfect matches for your portfolio. Sector ETFs, for example, can help provide safety in a risky industry through the diversity of their holdings. But there are also plenty of options for dividend investors looking for income.
Dividend ETFs with a high number of holdings across several sectors are an easy launchpad for beginning investors still deciding on a strategy -- or seasoned investors looking for some balance. Here's a look at three diverse dividend ETFs that can get you started.
1. iShares Dow Jones Select Dividend ETF (NYSEMKT: DVY )
The iShares Select Dividend ETF tracks the Dow Jones U.S. Select Dividend Index, with 101 holdings making up about $12.5 billion in assets. The ETF is up 14% in the past year and has a dividend yield of 3.37%.
Utilities make up more than 28% of the holdings, with industrials and consumer goods rounding out the top three sectors. The top companies are Lorillard (UNKNOWN: LO.DL ) , Lockheed Martin, and Chevron.
Reigning fund heavyweight Lorillard, accounting for 3.64% of all holdings, produces several brands of cigarettes in the U.S., including Newport and Max. The company's e-cigarette segment is making headlines after the Centers for Disease Control and Prevention reported that 10% of high-school students use the devices. A dubious Food and Drug Administration could begin to regulate the devices, which purport to help smokers kick the habit. But company financials aren't suffering from the controversy, trading up 14% in the past year and yielding 5%. This looks like a smart position for the ETF.
The iShares Select Dividend ETF has an expense ratio of 0.4%, which is the highest of the three. Its three-year net average value return is 18.93%, while the five-year average is 9.59%.
2. WisdomTree LargeCap Dividend Fund (NYSEMKT: DLN )
WisdomTree LargeCap Dividend Fund tracks the index of the same name and contains 299 holdings that add up to $1.7 billion in assets. The ETF is up 12% year to date and has a dividend yield of 3.17%.
Consumer staples, information technology, and financials lead the sector breakdown. Top companies include ExxonMobil, AT&T, Apple, and Microsoft.
WisdomTree LargeCap ETF has an expense ratio of 0.28% -- higher than the third entry in this list but still rather low by ETF standards. The three-year average NAV return is about 18%, while the five-year average sits at 7.37%.
3. Vanguard High Dividend Yield ETF (NYSEMKT: VYM )
Vanguard High Dividend Yield ETF tracks the FTSE High Dividend Yield Index and contains 388 holdings totaling $9.5 billion in assets. The ETF is up nearly 15% year to date and has a dividend yield of 2.96%.
Consumer goods, industrials, and financials lead the fund's sectors by weighting. The top companies include ExxonMobil, Johnson & Johnson, and General Electric -- three companies that benefit greatly from sheer scope and size.
The Vanguard High Dividend Yield ETF has a low expense ratio of 0.1%. Average three-year NAV return is more than 19%, while the five-year tops 8%.
How to choose
The right dividend ETF for you depends on what's needed in your portfolio. But there are a few things to keep in mind.
Vanguard has the lowest expense ratio; iShares' ratio is four times higher. The iShares ETF also has 50% of its assets in either utilities or industrials, while the other two have a broader mix in the top sectors. But Vanguard's top 10 companies represent almost 35% of its total assets compared to about 21% for iShares and 27% for WisdomTree.
So if you really need some Dow exposure and don't have it elsewhere -- or have a hankering for utilities -- consider the iShares ETF. If expense ratios top your list of concerns, then Vanguard may be the best pick. Or you could stick to the middle of the road with the dependable mixed bag, WisdomTree.
Foolish final thoughts
Dividend ETFs offer a chance for income investors to get in on some high-yielding, big-name companies at a cheaper price than investing in individual companies. And an ETF spread across several industries reduces general risk.
I'm personally leaning toward Vanguard's ETF because of the low expense ratio and its decent spread across sectors, but it's important to do your own research and see what fits in best with what you already own.