Top 7 High-Dividend ETFs to Maximize Income – September 2024

FinanceProsper Takeaways

• Some of the best returns for any high-dividend ETFs come from both KBWY and XSHD.
• Review the ETFs found within your brokerage account to find high-dividend ETFs.
• High-dividend ETFs pay for their cost of living, but maybe some planning could be involved.

These could be great sources of dividends for an income-seeking investor. Though investors use them with the purchase of dividend stocks, there is another choice for those who want to save some time on stock research: high-dividend ETFs.

7 Best High-Dividend ETFs for Income Investing in September 2024

Here is a list of the top seven large U.S. dividend ETFs arranged by annual dividend yield. Dividend ETFs yielding too much may show additional risk. One should always check the fine print on the details, doing due diligence to understand the details behind overly high dividends.

Source: Finviz. Data is up-to-date as of August 30, 2024. This information excludes inverse, leveraged, actively managed, and hedged ETFs, as well as those with expense ratios over 0.5%.

What is a Dividend ETF?

Dividend ETFs are funds that you can trade on the stock market. They invest in stocks with a strong track record of paying dividends to shareholders. When you buy a dividend ETF, the managers make sure the stocks in it always pay good dividends.

The managers of the dividend ETF are selected from a stock pool that tracks an index for dividends, like any other type of exchange-traded fund. It is this stock pool that gives investors a low-cost, diversified way to achieve income.

It will be easier to get money from a dividend ETF than from owning and managing one’s pool of individual dividend stocks. While a holder of fixed bonds does not give away the payment of dividends, hence it is harder for an independent investor to build a dividend stock portfolio.

How to Select the Right Dividend ETF for Your Portfolio

But with over 130 dividend ETFs in the Morningstar registry, it’s important to know how to pick the right fit for your portfolio. For instance, two funds might offer similar yields, but still, you find yourself drawn to the one whose dividends have grown faster in the past.

When choosing a dividend exchange-traded fund (ETF), keep the following in mind:

• Dividend yield. The percent of purchase price that has been returned through dividends over the past 12 months. So, an ETF worth $100 that has paid out $10 in dividends will have a 10% dividend yield.
• Dividend Growth: The fact that a company pays a dividend now does not mean it is going to in the future. Even if it continues to pay its dividend, there is no assurance it will increase it in the future. For this reason, some investors would rather invest in companies dubbed dividend aristocrats. The S&P 500 firms have consistently raised their dividends over the years.
• Dividend quality: all about the goodness and trustworthiness of the stocks inside of this ETF. A fund that has replaced more risky companies with lower credit rating promises, for all practical purposes, a decrease in the value of the fund and therefore a loss of your total return. Generally speaking, avoid those funds using riskier companies to increase yields.

The highest-yielding dividend ETFs will carry time-variable yields that are most probably going to be unsustainable. This is because the highest-yielding stocks tend to share price drops during a market downturn. This underlines the need to consider current yield, dividend growth, and quality.

Because these companies are growing slowly, traditional dividend ETFs are helpful. Investors, however, have to be armed with the realization of the tradeoff they could have sought after yielding more instead of growing upwards in stock price.

If you want to make the most money with your cash, you might pick stocks that are likely to go up in value and then sell some shares when you need money.

Types of Dividend ETFs: From High-Yield to International

There are dividend ETFs that cover a range of styles and asset categories, from index funds to regional areas of interest, from high-quality dividend stocks to the aristocrats. That is, some target sectors are known for yielding above-average dividends, like REITs, utilities, or preferred stocks.

We have listed a few well-known dividend ETF examples for each main category below. Again, please note these are not recommendations of any specific fund: Just some types of funds that you might want to consider as you search out the best dividend ETF for you.

• Dividend Differentiated ETFs. High-dividend ETFs include those with companies that pay above-average dividends. Companies that pay higher dividends will usually carry a greater risk and perhaps a more volatile price.
• International Dividend ETFs. International Dividend ETFs work pretty much the same as domestic high dividend ETFs, except they invest in companies from other countries instead of just the U.S. This can be even better diversification than the investment in purely domestic ventures. Their dividends may be more likely to be taxed than U.S. companies, and you may want to speak with a tax specialist if you rely extensively on international dividend ETFs.
• Real Estate Dividend ETFs: REITs are companies that either buy or lend money on revenue-producing properties. The law requires them to pay 90% of their income out to the shareholders; hence, they have been trendy for anyone seeking good dividend returns.
• Dividend Aristocrat ETFs: This would be the cream of all dividend-paying stocks. They are some of the largest concerns for investors desiring consistent and reliable dividend income.

Tax Implications of Dividend ETFs

Dividend ETFs are taxed as if you owned the stocks in the fund. It does not matter if the dividends are reinvested into the fund, they are considered income. Most investors will get tax forms, such as a 1099-DIV that show whether dividends from their portfolios are qualified or ordinary.

Qualified dividends parallel long-term capital gains in that they are both taxed at a much lower rate than regular income. The issuing entities of the qualified dividends are by and large U.S.-based companies. The ordinary dividends are paid or distributed from the earnings of foreign companies.

Dividend ETFs vs. Growth ETFs: Which is Right for You?

Dividend ETFs will attract prudent investors or those looking for a way to make money periodically. These funds are well-suited for investors who prefer a steady income stream through dividends.

Growth ETFs, investors who are aggressive and want to reap the most from their investments would serve better with growth ETFs that can afford them the chance to make more profits.

Aside from earnings, dividend ETFs also benefit from price appreciation. As these funds invest money in companies paying dividends, they get exposed to growth in these earnings, as well as the actual dividends paid.

Dividend ETFs may be a sensible choice for investors who consider investing in a portfolio of dividend-paying stocks but do not want to bother studying and picking individual stocks themselves.

However, the point to take note of is that dividend ETFs have risks attached to them. Like any investment, dividend ETFs also fall under ups and downs in the market and other effects of factors. Additionally, companies are free to reduce or eliminate their dividends at their own sweet will, which ultimately affects an investor’s performance.

Benefits of Investing in Dividend ETFs

Following are some top benefits of dividend ETFs.

• Diversification: Dividend ETFs can own many stocks and other securities, thus easing the task of diversifying risks that are associated with individual asset exposures.
• Low fees. ETFs usually cost less to manage than mutual funds or other investment types, which can help investors save money over time.
• Liquidity. Much like stocks, normally, these are traded on an exchange; equally, dividend ETFs can be easily traded. Due to the strong demand for dividend funds, this investment is usually very liquid.
• Transparency. Because active dividend ETF managers are required to disclose their holdings daily, you can see exactly what the fund holds and how it works. When it comes to tax efficiency, exchange-traded funds (ETFs) outperform mutual funds. For example, in the case of redemptions, no sale of underlying stocks takes place whereby realization of capital gains taxes could take place.

All in all, these benefits make dividend ETFs a great choice for investors looking for income. It is always, however, very important to do your own research and understand the risks before investing in any security.

Boost Your Income and Diversify with Dividend-Paying ETFs

Dividend-paying ETFs help those seeking to increase their income and diversify investments. As such, ETFs make for an easy investment in a sector given. In this case, it is stocks that pay consistent dividends.

You could use those dividends to boost your income, as many retirees do. You can also reinvest those dividends right back into the fund so that you have the opportunity to take advantage of the magic of compound interest with a boost in your investment portfolio. Whichever way you choose, dividend-paying ETFs make it rather easy to add lots of different investments to your portfolio all at once.

How to Invest in Dividend ETFs

A typical dividend ETF holds a few dozen or hundred dividend stocks. That’s diversification, and that’s one word for the safety of your payout. If some of the stocks in the fund decide to cut their dividends, it would affect the dividend of the fund as a whole very little. Really, one should consider the safety of payout as the primary factor for buying any type of dividend investment.

Here’s how to buy an ETF that pays dividends:

1. Dividend ETF hunt in wide-ranging investments. Most of the time, ETFs that provide dividends are browsed on the broker’s website that you own. Lacking a broker? Here’s how to open a brokerage account. Probably the safest choice is to invest in a low-cost fund that purchases dividend stocks in the S&P 500 stock index. That gives a broad spectrum of leading United States companies.

2. Analyze the ETF. Verify that the ETF has investments in stocks, sometimes known as equities, not bonds. You’ll also want to check the following:

• Dividend yield: Dividend yield is the amount of money a company pays out over one year through its dividend for the share price. To express it, a percentage is typically used.
• 5yr Returns. Generally higher the better.
• Expense Ratio: This annual fee is deducted from the money you have invested in the ETF. Look for an expense ratio less than 0.50%, but smaller is better.
• Stock Size. Dividend ETFs can invest in large, medium, or small market capitalization companies, also called large caps, mid caps, and small caps. Generally speaking, large caps are the safest, and the small caps carry the most risk.
• AUM (assets under management): The acronym AUM, or assets under management, represents the market value for all the assets that a fund manages. The AUM will show the magnitude of the fund. Low-AUM funds with high dividends can be volatile.

3. Invest in the ETF. You can invest in an ETF largely like you do in a stock through an online broker. The best strategy here is to invest regularly so that you benefit from dollar-cost averaging.

Can You Live Off ETF Dividends?

You can live off the dividends that the ETFs pay, but this does take a bit of planning and there is a sweet spot that balances out how much your investments make about your expenses. Use the 4% rule as a guide to the amount you could draw down from your retirement money. In other words, you should ideally withdraw roughly 4% of your savings annually.

If you’re expecting to live off the dividends from your ETFs, consider how much you might receive from Social Security, pension benefits, 401(k)s, and IRAs, for example. You can then begin to calculate how much more you will need to make up with ETF dividends. You will have to contact a financial advisor if you are about to retire and want to know how ETF dividends can help you in your lifestyle.