In 2022, dividends once again became a safe harbor for investors reeling from the broad market's high volatility and rising interest rates. Although many stocks decreased in price, dividend payers still provided investors with a nice income stream. As macro conditions in the new year remain bearish in many ways, you might be looking to increase your exposure to dividend-paying stocks.
But the question is, which ones should you purchase? With so many options, investors looking for broad dividend exposure may be better off looking at exchange-traded funds (ETFs) that focus on this niche. Three that come to mind are the ProShares S&P 500 Dividend Aristocrat ETF (NOBL 0.89%), Vanguard Real Estate ETF (VNQ +0.22%), and the Vanguard High Yield Dividend ETF (VYM 0.40%). All three have their place, so which one should you buy?
NYSEMKT: VNQ
Key Data Points
Each ETF has its own focus
These three ETFs aren't copies of each other, and each has its own specific focus. This also plays into how much each ETF yields (what percentage of the ETF price is paid in dividends to you annually). Investors shouldn't only focus on how high the dividend yield is, although it can certainly be a factor in the decision.
| ETF | Dividend Yield |
|---|---|
| ProShares S&P 500 Dividend Aristocrat ETF | 2.1% |
| Vanguard Real Estate ETF | 3.7% |
| Vanguard High Yield Dividend ETF | 3.0% |
Data source: YCharts.
For example, just because the Dividend Aristocrat ETF has a lower yield doesn't mean it should be ignored -- it has its purpose.
This ETF only owns S&P 500 companies that have paid and grown their dividends for at least 25 consecutive years. While the dividend yield isn't as high as the others, the reliability of the payouts from the companies in this fund is valuable to investors seeking stability.
Data by YCharts.
The above chart highlights how the ETF significantly outperformed the S&P 500 last year, and you can see that the steady dividend payers in this ETF offered the dual benefit of income and stability during the bear market.
Moving to an option with a higher yield, the Vanguard High Yield Dividend ETF aims to mirror the FTSE All-World High Dividend Yield index, which tracks companies with high yields worldwide. Because it's a global index, multiple economies are represented, which can be both good and bad.
However, most of the index is made up of U.S.-based companies, so it's certainly far from a foreign-focused investment.
The highest-yielding ETF in this trio is the Vanguard Real Estate ETF. This will be attractive to those who want to maximize their dividend income. However, the real estate industry is far from smooth, so the ETF won't be as stable as the other two. This is the price investors have to pay when prioritizing yield.
NYSEMKT: VNQ
Key Data Points
And there is another factor investors must consider.
The long-term performance of these dividend-focused funds isn't the best
While dividends aren't guaranteed, they are usually more predictable than share-price growth. Lower-risk investments (like dividend-paying stocks) typically underperform higher-risk investments, which is precisely what has happened over the past decade (even when dividends were reinvested in the ETF).
Data by YCharts.
One thing to note is that the ProShares Dividend Aristocrat ETF almost matched the return the broader index while also being more price stable. This could make this ETF a strong choice for someone in retirement, as you only give up a few percentage points in performance as a trade-off.
If you spend or bank the dividends, the broader market's outperformance becomes more evident.
Data by YCharts.
Another takeaway is that real estate hasn't had a great decade. This could change in the coming years, but the high dividend yield hasn't replaced outright stock performance. Additionally, the global-focused High Dividend Yield ETF struggled, because the U.S. stock market has vastly outperformed the rest of the world in the past decade.
All of this could change in the next decade too. In the end, yield, stability, and total return are all variables investors should consider as they weigh the pros and cons of giving dividends a place in their portfolio.
