Most exchange-traded funds (ETFs) are passively managed and tied to an index of some sort. The big indexes are easy to understand, like the S&P 500 index. However, things get more complicated when you focus on a particular type of investing, like dividends.
There are different ways to slice and dice dividend stocks, so you need to pay close attention to the details if you are buying an ETF as a dividend lover. That said, two ETFs you'll want to get to know are the Vanguard Dividend Appreciation ETF (VIG 0.10%) and SPDR Portfolio S&P 500 High Dividend ETF (SPYD -0.15%). Here's why.
For the dividend growth investor
Although many investors focus on dividends for current income, that doesn't mean they can't be used to identify growth opportunities. Basically, companies that are able to increase their dividends at a rapid clip are likely to be attractive from a growth perspective, too. The big benefit for investors is that the rapid dividend hikes help to increase the buying power of your income stream over time, even in the face of inflation. Investors focused on maximizing income might want to layer in some money for dividend growth stocks, too, for this very reason.
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A strong choice in that space is the Vanguard Dividend Appreciation ETF. Like most Vanguard offerings, it is very cheap to own, with an expense ratio of just 0.06%. And while the dividend yield is a bit miserly at around 1.8%, that's more than the 1.4% or so you'd get from buying an S&P 500 index fund. And with roughly $88 billion in assets, it is popular enough that it isn't going to get shut down anytime soon.
The index backing the Vanguard Dividend Appreciation ETF is the S&P U.S. Dividend Growers Index. The core of the index makes complete sense, as it tracks companies that have increased their dividends for at least a decade. However, the unique positioning here is that it removes the highest-yielding 25% of potential index candidates.
The purpose of that isn't to keep the yield down, but to pull out companies that are likely in the value category or that may be facing financial difficulty. It helps to focus the index on stocks with better dividend growth potential. Notably, the per-share dividend that Vanguard Dividend Appreciation ETF paid increased each year between 2019 and 2023, so it is living up to its name.
For the high-yield investor
Dividend growth investing is great, but it isn't the only way to invest in dividend stocks. A lot more people look to dividends to support spending in retirement. For those investors, a solid ETF to look at is the SPDR Portfolio S&P 500 High Dividend ETF. The logic here isn't complex -- the fund simply takes the S&P 500 index constituents and pulls out the 80 that have the highest yield.
The big attraction here is the fund's 4.6% dividend yield. That's well above both the S&P 500's yield and Vanguard Dividend Appreciation ETF's yield. In fact, it is more than twice as high as both! And it comes with a still-attractive expense ratio of just 0.07%. While not as large as the Vanguard ETF, with nearly $7 billion in assets, the SPDR Portfolio S&P 500 High Dividend ETF isn't likely to get shut down.
That said, there's a trade-off here. Unlike Vanguard Dividend Appreciation, the SPDR Portfolio S&P 500 High Dividend ETF is specifically looking to own value stocks, out-of-favor companies, and those that may be experiencing financial difficulties. That's what buying the 80 highest-yield stocks in the S&P 500 Index will, effectively, leave you owning. But if you are looking for an income-focused equity ETF, starting with companies that are in the S&P 500 index, a hand-selected group based on their importance to the broader economy, is a good foundational choice.
Take the time to understand what you own
Exchange-traded funds aren't as simple a solution as you might think. Yes, they make investing simple, but you need to dig into the logic of the ETF to really understand if the fund actually does what you want or need it to do. Dividend investors often fall into one of two camps, dividend growth and high yield. The Vanguard Dividend Appreciation ETF and SPDR Portfolio S&P 500 High Dividend ETF are core options in those approaches and can be your best friends if you are looking to build an ETF portfolio with a dividend focus.
