What are dividend index funds? Let's take each word in reverse order. First, they're funds -- either mutual funds or exchange-traded funds (ETFs). Second, they attempt to track an index that consists of multiple stocks. Third, their focus is on stocks that pay dividends.
Just as dividend stocks aren't ideally suited for every type of investor, dividend index funds won't appeal to everyone. However, if you're primarily interested in obtaining steady income from your investments, these funds could be just what you're looking for. And there's no stock-picking required.
5 top dividend index funds
Here are three top considerations when selecting dividend index funds to buy:
- Dividend yield: Dividends paid as a percentage of the fund's price.
- Expense ratio: The percentage of fund assets used for operating costs.
- Risk level: How risky the fund is.
To some extent, there's a trade-off between dividend yield and risk level. Generally speaking, higher yields are associated with higher risk. But higher expense ratios don't necessarily translate to higher dividend yields or lower risk levels.
Here are five dividend index funds listed in alphabetical order that have relatively low expense ratios but with varying dividend yield and risk levels.
|Fund||Dividend Yield||Expense Ratio||Risk Level|
Invesco S&P 500 High Dividend Low Volatility ETF (NYSEMKT:SPHD)
iShares Core High Dividend ETF (NYSEMKT:HDV)
ProShares S&P 500 Aristocrats ETF (NYSEMKT:NOBL)
Schwab US Dividend Equity ETF (NYSEMKT:SCHD)
Vanguard High Dividend Yield ETF (NYSEMKT:VYM)
Invesco S&P 500 High Dividend Low Volatility ETF
This ETF attempts to track the S&P 500 Low Volatility High Dividend Index. As the name of the index indicates, it targets dividend stocks that historically haven't been very volatile but that also provide high dividend yields. The ETF includes 50 stocks, with its highest allocation to utility stocks and consumer staples stocks.
iShares Core High Dividend ETF
The iShares Core High Dividend ETF attempts to track an index that consists of 75 U.S. stocks that pay relatively high dividends. Its top holdings include several energy stocks and big pharmaceutical stocks.
ProShares S&P 500 Aristocrats ETF
This is the only ETF that exclusively tracks the performance of Dividend Aristocrats -- S&P 500 members that have increased their dividends for at least 25 consecutive years. As you might expect, these stocks tend to have lower risk levels. This ETF currently owns 65 Dividend Aristocrat stocks.
Schwab US Dividend Equity ETF
The Schwab US Dividend Equity ETF seeks to track the total return of the Dow Jones U.S. Dividend 100 Index. This index focuses on U.S. stocks with high dividend yields and a strong track record of consistently paying dividends. Financial stocks make up more than 25% of the ETF's holdings.
Vanguard High Dividend Yield ETF
This ETF attempts to track the performance of the FTSE High Dividend Yield Index. The index includes only U.S. stocks with high dividend yields but excludes real estate investment trusts (REITs). The Vanguard High Dividend Yield ETF currently owns more than 400 stocks, with financial stocks representing over 20% of its assets.
Why invest in dividend index funds?
Dividend index funds will be most attractive to income-seeking investors. The top funds provide solid dividend yields and diversification across a wide range of stocks, which can be less risky than buying a smaller number of individual dividend stocks.