There is no shortage of excellent, low-cost exchange-traded funds (ETFs) that specialize in dividend stocks. There are some that focus on stocks that pay above-average dividends, stocks whose dividends grow rapidly, and dividend-paying stocks that have certain characteristics in common. And there are plenty of examples that could make excellent additions to your portfolio.
Having said that, here are three ETFs, all from low-cost index fund pioneer Vanguard, that could form an excellent backbone to a dividend-investing portfolio to hold and to add to for many years to come.
High dividends aren't the only thing to consider
There are some excellent index funds that focus on stocks with above-average dividend yields. But it's important to know that if you're a long-term investor, dividend growth can be just as important.
That's why the Vanguard Dividend Appreciation ETF (VIG +0.27%) is one of my top dividend ETFs to buy and hold forever. The fund has a rock-bottom 0.05% expense ratio and tracks an index of large-cap stocks that have track records of raising their dividends every year. As of this writing, top holdings of the fund include Broadcom (AVGO +0.17%), Apple (AAPL 0.17%), and JPMorgan Chase (JPM 0.82%). These aren't the highest-paying dividend stocks, but they offer an excellent combination of growing income and stock-appreciation potential.
NYSEMKT: VIG
Key Data Points
Over the past 10 years, the dividend-appreciation ETF has produced an 11.6% annualized total return, so don't cross it off your list because it has a dividend yield of only 1.7%. This can be an excellent dividend ETF for investors who have decades to let their money compound, and by nature, its income stream should get quite a bit larger over time.
Looking beyond the U.S. for income
One recent focus of mine has been to diversify my portfolio internationally. As part of my efforts to do this, I added shares of the Vanguard International High Dividend Yield ETF (VYMI +0.47%). https://investor.vanguard.com/investment-products/etfs/profile/vymi#portfolio-composition
As the name suggests, this ETF tracks an index of companies based outside of the United States that have above-average dividend yields. There are approximately 1,500 stocks in this weighted index fund, and although they are all international stocks, you might be surprised to learn that many of the top holdings are household names to many Americans. For example, Toyota (TM +0.21%), Nestle, and Novartis are among the five largest positions.
Not only does this ETF offer a stellar 4.5% yield but now could be a great time to buy at a discount. The average stock in the portfolio trades for less than 12 times earnings and for 1.4 times book value. For context, the typical stock in the Vanguard High Dividend Yield ETF (VYM 0.05%) -- the U.S. equivalent -- trades for a price-to-earnings (P/E) ratio of nearly 20 and for about 2.8 times book.
A beaten-down sector
The real estate sector has been one of the worst performing parts of the stock market for the past few years, and for good reason. Although most major real estate investment trusts, or REITs, are doing quite well business wise, this is an especially rate-sensitive group of stocks. In fact, over the past three years, the Vanguard Real Estate ETF (VNQ +0.95%) has underperformed the S&P 500 index by 38 percentage points.
However, with interest rates widely expected to trend downward in the coming years, now could be a smart time to buy. Plus, although this isn't specifically a "dividend ETF," since REITs are required to pay out at least 90% of their taxable income, it has a 3.6% yield.
Top holdings include some of the largest and most rock-solid real estate companies in the world, such as industrial real estate giant Prologis (PLD +0.95%), communications infrastructure leader American Tower (AMT 1.53%), and data center operator Equinix (EQIX +0.01%).
To sum it up, these are three solid, but very different, dividend ETF options to consider if you're looking to add both income and growth potential to your long-term investing portfolio.
