Federal funds traders are pricing in an 87% likelihood that the Federal Reserve cuts interest rates this week. That means high-yielding income investments will become even harder to find, as U.S. Treasury yields dip ahead of the Fed's expected announcement. This would mark the Fed's third rate cut of 2025, and while there's some uncertainty, traders expect more cuts in 2026.
The dawn of a new low-rate era makes dividend-growing stocks essential for income investors. While there are numerous individual stocks with storied histories of growing payouts for decades, such as the Dividend Kings, two exchange-traded funds (ETFs) should be top of mind for investors looking to harness consistently growing income streams from a diversified portfolio.
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1. Schwab U.S. Dividend Equity ETF
Launched in October 2011, the Schwab U.S. Dividend Equity ETF (SCHD 0.14%) is designed to track the performance of the Dow Jones U.S. Dividend 100 Index, which was in turn built to track 100 companies that have grown dividends annually for a minimum of 10 consecutive years.
Crucially, the fund doesn't blindly chase high yields, a strategy that could leave investors prone to value traps. Instead, it zeroes in on consistent dividend growers that also have strong fundamentals, taking into account metrics such as cash-flow-to-debt ratio, return on equity, dividend yield, and five-year dividend growth rate. The fund conducts a monthly review of its holdings, and any stock that cancels its dividend is struck from the portfolio.
Because the Schwab U.S. Dividend ETF seeks to track this index as closely as possible, before taxes or fees, it offers exposure to quality dividend stocks that have met stringent criteria for inclusion in the index. Among its top-10 holdings are the soft drink dominator Coca-Cola, the semiconductor company Texas Instruments, and pharmaceutical giant AbbVie, which have each raised their dividends in 2025 (by 5.2%, 4%, and 5.5% respectively).
NYSEMKT: SCHD
Key Data Points
Those hikes may not be enormous, but they are all well above the annual inflation rate of 3%. If dividends grow faster than inflation, year after year, then in a few years' time they can become a formidable income stream, provided they start at a high enough base yield. This fund's current yield of 3.8% certainly fits that bill, as it is over triple the yield of the average S&P 500 company.
The Schwab U.S. Dividend Equity ETF has returned an average of 12.17% per year since its 2011 inception. It carries an expense ratio of 0.06%, which is less than half the industry average of 0.14%.
2. SPDR S&P Dividend ETF
The SPDR S&P Dividend ETF (SDY 0.02%) is designed to generally track the S&P High Yield Dividend Aristocrats® Index, which in turn selects for stocks that have raised dividends for at least 20 consecutive years, weighting these stocks by yield. The term Dividend Aristocrats® is a registered trademark of Standard & Poor’s Financial Services.
NYSEMKT: SDY
Key Data Points
Since its November 2005 inception, the fund has achieved an average annual return of 8.65%. Among its top-10 holdings are Verizon Communications, Chevron, and Target, which raised their dividends by 1.88%, 5%, and 1.8%, respectively, in 2025.
As you can see, some of this fund's top holdings have seen dividend growth that lagged this year's inflation rate. Year to date, the fund has returned only 5.88%, underperforming the S&P 500's total return of 17.8% year to date rather severely. However, there's a good reason for this. The SPDR S&P Dividend ETF is light on tech, with its biggest sector weighting being industrials at 19.26%, followed by consumer staples at 17.56% and utilities at 14.26%. In a rally that has been powered by enthusiasm around AI-related companies, this underperformance is to be expected. And if the tech rally soon fades, as many fear it soon will due to excessive valuations, a sector rotation into utilities and other more defensive sectors could be a big tailwind for this fund going into 2026.
The SPDR S&P Dividend ETF also offers exposure to real estate investment trusts (REITs), which are not represented in the Schwab U.S. Dividend Equities ETF's portfolio. REITs, or companies that own or finance income-generating real estate, are natural beneficiaries of falling interest rates, as income investors typically flock to these higher-yielding investments.
The fund carries an expense ratio of 0.35%, which is well above the industry average but still below the 0.40% average expense ratio for equity mutual funds. Its yield stands at 2.6%, which is over double that of the average S&P 500 company.
So, which fund is best for you?
These funds offer different advantages, risks, and potential drawbacks to keep in mind.
The SPDR S&P Dividend ETF is more diversified, with 152 holdings, and offers exposure to REITs as mentioned. It also screens for a lengthier track record of annual dividend increases, with a minimum of 20 years compared to 10 for the Schwab U.S. Dividend Equity ETF.
However, the Schwab U.S. Dividend Equity ETF's lower expense ratio and higher yield may make it more attractive to investors with a short-to-medium term outlook. Ultimately, both of these funds offer above-average yields that could grow significantly in the years ahead, making them buys for investors looking to navigate falling interest rates.
