Dividend stocks are a great way to earn extra income, but owning dividend stocks requires regular research. Shareholders risk losing money if they fail to familiarize themselves with the underlying companies. Hefty payouts can mean very little if the stock itself depreciates substantially.

Income investors can sidestep that risk with index funds, particularly those that are diversified across a broad range of dividend stocks. Shareholders still need to understand any index funds they own, but that requires much less work than keeping tabs on multiple companies.

Here are two dividend-paying index funds that have reliably made money for patient investors.

1. Vanguard High Dividend Yield ETF

The Vanguard High Dividend Yield ETF (VYM -0.20%) tracks 452 large publicly traded U.S. companies that are forecast to have above-average dividend yields. It includes value stocks from 10 of the 11 market sectors (every sector except real estate), but its weighted exposure skews toward financials, healthcare, and consumer staples.

The current dividend yield is 3.4%, and the last dividend payment was $0.78 per share in September. History says the next dividend payment will take place in December. The five largest holdings in the Vanguard High Dividend Yield ETF are detailed below:

  1. ExxonMobil: 3.6%
  2. JPMorgan Chase: 3.2%
  3. Johnson & Johnson: 2.9%
  4. Procter & Gamble: 2.6%
  5. Broadcom: 2.6%

The Vanguard High Dividend Yield ETF returned 134% over the past decade, or 8.9% annually. That falls far short of the 204% return in the broader S&P 500. The reason for that underperformance is relatively low exposure to the technology sector, which was easily the best-performing sector over the past decade.

The compensation for that underperformance is above-average dividend payments and below-average volatility. As noted, the Vanguard High Dividend Yield ETF currently pays a 3.4% yield. That easily tops the 1.62% yield paid by the broader S&P 500. The index fund also bears a 10-year beta of 0.86, meaning it moved 86 basis points for every 100-basis-point movement in the S&P 500.

The last important number is the 0.06% expense ratio. That is well below average, and it means investors would pay just $6 per year on a $10,000 portfolio. All things considered, the Vanguard High Dividend Yield ETF is a good option for investors who would gladly exchange market-beating returns for robust and reliable dividend payments.

2. Vanguard Dividend Appreciation ETF

The Vanguard Dividend Appreciation ETF (VIG 0.10%) tracks 314 large U.S. companies that have consistently increased their dividend payments over the last decade. It includes growth stocks and value stocks from 10 of the 11 market sectors (real estate is excluded), but its weighted exposure skews most heavily toward technology, financials, and healthcare.

The dividend yield is currently 1.97%, and the last dividend payment was $0.77 per share in early October. History says the next dividend payment will take place in early January. The five largest positions in the Vanguard Dividend Appreciation ETF are detailed below:

  1. Microsoft: 5.3%
  2. Apple: 4.4%
  3. UnitedHealth Group: 3.5%
  4. ExxonMobil: 3.1%
  5. JPMorgan Chase: 2.9%

The Vanguard Dividend Appreciation ETF returned 168% over the last decade, or 10.4% annually. That falls short of the 204% return in the S&P 500, but tops the 134% return in the Vanguard High Dividend Yield ETF. That in-the-middle performance is a product of its in-the-middle exposure to the technology sector.

Here again, the compensation for underperformance is above-average dividend payments and below-average volatility. The yield currently sits at 1.97%, modestly higher than the 1.62% yield paid by the broader the S&P 500. The index fund also bears a 10-year beta of 0.87, meaning it moved 87 basis points for every 100-basis-point movement in the S&P 500.

The Vanguard Dividend Appreciation ETF has a below-average expense ratio of 0.06%. This index fund is a great option for investors who want reliable and above-average dividend payments, but also bigger returns than the Vanguard High Dividend Yield ETF is likely to provide.

Index funds can supplement a portfolio of individual stocks

The index funds discussed above are a great way to spread money across hundreds of dividend-paying companies, but investors do not need to choose between index funds and individual stocks.

Personally, I have most of my portfolio invested in growth stocks, many of which fall into the technology sector. But I also own a few index funds that improve my exposure to market sectors and companies that I follow less closely.