In today's low-interest-rate environment, many investors are shifting their search for income from bonds to dividend-paying stocks. The biggest risk from that move is that because of the economic slowdown put in place to combat COVID-19, many companies are slashing their dividends. When a company cuts its dividend, its share price often drops, too. That leaves an investor both without the expected income and with a smaller capital base to invest, which only serves to make things worse.
A way to blunt the impact of potential dividend cuts is to buy an ETF that itself pays dividends. That way, even if some constituents of the ETF cut their dividends, the shares of other companies that managed to maintain or raise their dividends would help reduce the damage to your overall portfolio. It's still no guarantee of success, but it beats seeing your portfolio ravaged by a single major holding that's running into trouble. With that in mind, these three ETFs are among the best for dividend-seeking investors.
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No. 1: Vanguard's Dividend Appreciation Index ETF
Leave it to Vanguard to come up with a low-cost way to invest in a basket of companies that have a history of not only paying, but increasing their dividends. The Vanguard Dividend Appreciation Index ETF (VIG 0.17%) attempts to track the NASDAQ US Dividend Achievers Select index, which consists of companies with at least a 10-year history of increasing their dividends. This select index also excludes partnerships and real estate investment trusts, which have been disproportionately hit by the COVID-19 slowdown.
The Vanguard Dividend Appreciation Index ETF carries a minuscule 0.06% expense ratio. While its 1.9% yield may seem small, it's important to note that the cash distribution it just paid at the beginning of July was just over $0.60 per unit, up around 27% from the $0.473 it paid in June 2019. That's a great increase in any economy, but in one where companies are frequently cutting their payments, it's downright incredible.
Note that since this is an ETF that tracks an index, some of that increase might be due to proceeds from sales it made when companies that cut their dividends got removed from the underlying index. Still, in a time when the news is overflowing with dividend cuts, it's nice to see an increased payout to holders of the ETF.
No. 2: Schwab's US Dividend Equity ETF
The Schwab US Dividend Equity ETF (SCHD) seeks to track the Dow Jones US Dividend 100 index. That index consists of 100 companies with at least a 10-year history of dividend payments, decent dividend growth rate, and solid financial measures as defined by cash flow to debt ratios. The Schwab US Dividend Equity ETF also carries a pretty low expense ratio, clocking in at 0.06%.
Schwab's US Dividend Equity ETF currently sports a 3.5% yield. Its recent dividend of $0.442 is up around 5% from last year's level of $0.421, but its dividends are down from the levels paid in September and December of 2019. A beefier yield and a slower -- but still upward-sloping -- dividend growth rate may appeal to investors looking more for current income than for income growth. Still, any dividend growth is appreciated, particularly these days.
No. 3: Global X MLP & Energy Infrastructure ETF
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By far the highest current yielding ETF on this list, the Global X MLP & Energy Infrastructure ETF, (MLPX 0.91%), currently offers its owners a yield around 8.9%. In addition to being the highest yielding, it's also the least diversified, focused extensively on energy infrastructure companies like pipelines. It also carries a higher management fee than the others, although its expense ratio of around 0.45 isn't outrageous for a fund that's narrowly focused rather than a broader index tracker.
What makes the Global X MLP & Energy Infrastructure ETF worth considering is that its focus is on energy infrastructure companies, not energy producers. Although oil prices briefly traded at negative levels as the extent of the COVID-19 economic slowdown became apparent, people and companies are still using oil and natural gas. That energy needs to be transported from where it's produced to where it's processed and/or consumed, and pipelines tend to be a pretty low-cost way of moving it around.
Being a low-cost way of transporting energy around makes pipelines more resilient to declines in energy demand and pricing than many other energy companies. As a result, their dividends have a better chance of holding up during a downturn. Indeed, some of the ETF's holdings have found a way to increase their dividends, even in the middle of the mayhem.
Still, it's worth noting that while midstream energy companies are better able to hold up to low prices than producers, if low demand and pricing persist too long, even these businesses can suffer. After all, if too many producers leave the business and stop digging up energy supplies, there won't be enough energy flowing through those pipelines to cover their operating costs. That would cause the pipelines to suffer.
While the Global X MLP & Energy Infrastructure ETF does focus on a more resilient part of the energy market, the fact that it is offering an 8.9% yield does point to the risks facing energy stocks today. Among the higher-yielding ETFs, this one has a reasonable chance of seeing its payouts maintained given where it focuses in its industry. Still, if you're considering buying it, recognize the unique risks of industry concentration and limit your exposure in the event the worst comes to pass.
