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 rather than high growth from your investments, these funds could be just what you're looking for. And, there's no stock-picking required.
8 top dividend index funds
Here are eight dividend index funds listed in alphabetical order that have relatively low expense ratios but varying dividend yields 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 U.S. Dividend Equity ETF (NYSEMKT:SCHD)
Vanguard High Dividend Yield ETF (NYSEMKT:VYM)
Vanguard Dividend Appreciation Index ETF (NYSEMKT:VIG)
iShares Core Dividend Growth ETF (NYSEMKT:DGRO)
Vanguard Real Estate ETF (NYSEMKT:VNQ)
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 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 U.S. Dividend Equity ETF
The Schwab U.S. 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 more than 20% of its assets.
Vanguard Dividend Appreciation Fund Index ETF
The Vanguard Dividend Appreciation Fund Index ETF tracks the NASDAQ US Dividend Achievers Select Index, which consists of 247 companies that have increased their dividend over long periods of time. The idea is to include companies that have a long track record of dividend growth, which speaks to superior capital management.
iShares Core Dividend Growth ETF
Similar to Vanguard's Dividend Appreciation ETF, the iShares Core Dividend Growth ETF seeks to replicate the performance of companies that have consistently increased their dividend. This ETF tracks the Morningstar US Dividend Growth Index, which is nearly 50% larger than the NASDAQ US Dividend Achievers Select Index. With nearly 400 holdings, the opportunity set is slightly larger here compared to Vanguard's fund.
Vanguard Real Estate ETF
The real estate world also has the potential to generate meaningful income through dividends. The Vanguard Real Estate ETF invests in REITs, as well as in companies that invest in office buildings, hotels, and a variety of other properties. This ETF tracks the MSCI US Investable Market Real Estate 25/50 Index, which consists of about 175 companies.
What to look for in dividend index funds
A good first step is to determine your overall asset allocation, and, as a follow-up, determine how much you have to invest in stocks and/or equity index funds. Once you've done the pre-work, you can visit any of the major online discount brokerages, such as Vanguard, Fidelity, or Charles Schwab, all of which offer free (or very low-cost) ETF trading.
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.
Additionally, it's important to remember that dividend yield alone does not act as a perfect indicator of future performance. By focusing only on companies that pay dividends, you're leaving out a large number of companies, such as big tech, that derive their growth from price appreciation.
Make sure that you construct a diversified portfolio that covers a wide population of underlying firms with different capital strategies.
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. Consider dividend index funds as part of a broadly diversified portfolio that considers your overall risk tolerance and return expectations.