If you believe that investing in dividend-paying exchange-traded funds (ETFs) is a rich person's sport, nothing could be further from the truth. The reality is that you have a multitude of options. If you're not quite sure where to get started, here are two popular dividend-paying ETFs to consider, each with unique features that set them apart from the crowd. A $100 investment (or any amount, really) in each of these funds will pay off over time as both are smart investment vehicles for your money.
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Fidelity High Dividend ETF
How it works
Fidelity High Dividend ETF (FDVV -0.65%) tracks the Fidelity High Dividend Index, targeting U.S. large- and mid-cap companies that offer high, sustainable, and growing dividends. This approach seeks not only big payouts but also durable income streams. Leading its 111 holdings (as of June 13) are tech giants Nvidia, Apple, Microsoft, Broadcom, and Dell Technologies.
With a relatively low expense ratio of 0.15% (or $1.50 for every $1,000 invested annually), you can be confident that fees won't eat up your capital over time.
Earnings history
As with any investment, the past performance of an ETF is no guarantee of what you can expect moving forward. Still, this Fidelity ETF has a lot to brag about. Here's a look at how the ETF has done over the past three years:
- Year to date: 9.85% total return
- 1-year: 24.5% total return
- 3-year: 19.4% total (annualized) return
Why it's a smart buy
Unlike other high-yield ETFs, FDVV's methodology allows the fund to hold massive weightings in top dividend-paying tech stocks. Holdings such as Microsoft, Apple, and Nvidia have helped FDVV's returns outpace those of other, more traditional funds.
Vanguard Dividend Appreciation ETF
How it works
Vanguard Dividend Appreciation ETF (VIG +0.23%) is a large-cap U.S. equity ETF, tracking the S&P U.S. Dividend Growers Index. The fact that the S&P U.S. Dividend Growers Index holds companies with at least a 10-year record of consistently increasing dividends speaks to the fund's focus on sustained growth and income.
Like FDVV, this Vanguard ETF's 331 holdings (as of June 13) are led by top names in tech, including Broadcom, Apple, and Microsoft. It's also heavily invested in the healthcare and financial sectors. An extremely attractive expense ratio of 0.04% means only 4 cents of your initial investment will go toward fees.
Earnings history
VIG earnings over the past decade have been impressive. Here are the annual gains from 2020 onward. While it's clear the fund went through a rough patch in 2022, it's since more than made up for it.
- Year to date: 8.2% total return
- 1-year: 20.1% total return
- 3-year: 15.7% total (annualized) return
Why it's a smart buy
To understand why VIG is such a smart buy, it's important to understand what a "yield trap" is. A yield trap is a fund (or individual stock) that looks attractive because it has a very high dividend yield. However, that high yield is mainly due to a falling share price, not to the strength of the underlying business or to growing dividends.
To avoid potential yield traps, VIG filters them out by excluding the top 25% highest-yielding stocks. While that may sound counterintuitive, it serves the purpose of avoiding companies offering high yields largely because their stock prices have collapsed. The goal is to capture businesses with strong foundations and the capacity for long-term growth.
If you're paying more for groceries and at the pump, a solid dividend-paying ETF can help offset those expenses.
