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The 3 Best ETFs for Dividends

By Matthew Frankel, CFP® – Updated Jun 30, 2020 at 9:14AM

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If you want great dividends but don’t want to buy individual stocks, this list is for you.

Every well-rounded investment portfolio should have significant exposure to the stock market. But let's face it – choosing individual stocks isn't right for everyone. To pick individual stocks, you'll need a decent knowledge of basic analytical principles, the time to do your homework and identify great stocks to buy, and the risk tolerance to have your portfolio's performance tied to a basket of companies instead of the stock market as a whole. If all of those things don't apply to you, investing in exchange-traded funds, or ETFs can be the best way for you to invest.

When it comes to ETF investing, some of the most cost-effective funds are offered by Vanguard, which pioneered the concept of low-cost index fund investing and continues to offer some of the best index ETFs in the market.

With that in mind, here's why the Vanguard High Dividend Yield ETF (VYM -1.54%), the Vanguard Real Estate ETF (VNQ -2.94%), and the Vanguard S&P 500 ETF (VOO -2.08%) could be excellent choices for investors who want income from their portfolio while keeping their investment strategy on auto-pilot.

Man reading stock quotes in newspaper.

Image source: Getty Images.

High dividends from rock-solid companies

If dividends are a priority for you, but you also don't want to sacrifice long-term growth potential, the Vanguard High Dividend Yield ETF could be a great fit. The fund tracks an index of about 400 stocks that pay above-average dividend yields, and is weighted by market capitalization, so the larger companies play a bigger role in the ETF's performance. Top holdings include Johnson & Johnson (NYSE: JNJ), JPMorgan Chase (NYSE: JPM), Procter & Gamble (NYSE: PG), and Intel (NASDAQ: INTC) just to name a few, but there are many other large and well-known value stocks in the portfolio as well.

Because the fund focuses on companies with above-average dividend yields, it currently pays 3.9%, about twice the yield of the S&P 500. And with a low 0.06% expense ratio, the fees are about as low as you'll find for a dividend-focused ETF.

Real estate for growth and income

I'm a big fan of real estate investment trusts, or REITs, as a long-term investment for both growth and income. In fact, there's no sector that's represented more in my own stock portfolio than real estate.

Because REITs are required to pay out at least 90% of their taxable income to shareholders, they tend to have relatively high dividend yields. And since real estate values tend to rise over time, and many REITs develop properties and employ other value-creation strategies, the long-term growth potential can be rather impressive as well.

If you aren't comfortable selecting individual REITs to invest in, the Vanguard Real Estate ETF can be a great way to get exposure to a diverse index of REITs in your portfolio. The ETF currently has a dividend yield of more than 5% and since real estate was especially hard-hit by the COVID-19 pandemic, now could be a great time for long-term investors to get in.

Buffett's favorite investment for most Americans

Although it's not a dividend-focused fund, the S&P 500 has historically produced an excellent combination of income and growth. Plus, a solid S&P 500 ETF like the Vanguard S&P 500 ETF can be a great "backbone" of a portfolio, so it's worth mentioning here.

In fact, Warren Buffett has said several times that a S&P 500 index fund is the single best investment that the majority of Americans can make. And Buffett has called out Vanguard for its ultra-low-fee approach – the 0.03% expense ratio offered by its S&P 500 index fund means that your investment fees will be just $0.30 annually for every $1,000 you have invested. As Buffett puts it, an investment in the overall S&P 500 stock index is a bet on American business, and that's a bet that's paid off nicely for over two centuries and should continue to do so in the future.

Matthew Frankel, CFP has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Vanguard REIT ETF. The Motley Fool owns shares of Vanguard High Dividend Yield ETF and Vanguard S&P 500 ETF. The Motley Fool recommends Intel and Johnson & Johnson. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Vanguard Whitehall Funds - Vanguard High Dividend Yield ETF Stock Quote
Vanguard Whitehall Funds - Vanguard High Dividend Yield ETF
VYM
$96.27 (-1.54%) $-1.51
Vanguard Specialized Funds - Vanguard Real Estate ETF Stock Quote
Vanguard Specialized Funds - Vanguard Real Estate ETF
VNQ
$79.28 (-2.94%) $-2.40
Vanguard Index Funds - Vanguard S&P 500 ETF Stock Quote
Vanguard Index Funds - Vanguard S&P 500 ETF
VOO
$333.38 (-2.08%) $-7.10

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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