In light of the Federal Reserve’s recent interest rate increase, dividend stocks have continued to take it on the chin. The prevailing idea is that investors will be able to find “safer” high-yielding alternatives than in shares of firms that pay dividends.
However, investors may not want to abandon dividend stocks all together. In fact, they may want to add them in the New Year.
The reason? Dividend stocks have been the major driver of stock market returns over the long stretches of time. According to mutual fund powerhouse Fidelity, dividend stocks have accounted for about 40% of the S&P 500’s returns since 1930.
Perhaps even better is when looking at just the dividend stocks in the index. These firms managed to beat not only nondividend payers, but the broader S&P 500 by about 1.6% annually over this long stretch of time. The combination of rising dividend payments and lower volatility has contributed to their outperformance.
With that in mind, investors may want to buy some of the dividend stocks that have now become bargains. And the best way to do that could be through exchange-traded funds (ETFs) that focus on the market segment.
Here are three dividend stocks ETFs to buy today.
Dividend ETFs to Buy: iShares Core High Dividend ETF (HDV)
Expenses: 0.12%, or $12 per $10,000 invested
HDV tracks the Morningstar Dividend Yield Focus Index — which is a measure of U.S. firms that pay above-average dividends. However, the ETF isn’t just about a large headline yield. The fund takes it one step further by using various screens to eliminate dividend stocks without significant economic moats or with lower-than-average returns on capital.
These factors create a portfolio of 75 of the “best” and strongest high-yielding dividend stocks in the U.S. Top holdings for HDV include pharmaceutical giant Merck (MRK) and energy play Exxon Mobil (XOM).
This focus on high yield plus quality creates a market-beating 3.68% SEC yield for the ETF. Even better has been the fund’s annual total return of over 12% since its launch back in 2011.
And as a member of the iShares core suite of ETFs, HDV is a dirt-cheap way to gain access to dividend stocks.
Dividend ETFs to Buy: Vanguard Dividend Appreciation Index ETF (VIG)
While high-yielding dividend stocks can be satisfying on the current income front, sometimes lower-yielding stocks with a history of dividend growth could be a better play. And for that, the Vanguard Dividend Appreciation Index ETF (VIG) is the top choice.
VIG follows the NASDAQ U.S. Dividend Achievers Select Index. These so-called “dividend achievers,” “dividend aristocrats” or even “dividend kings” represent stocks that have decades worth of uninterrupted and increasing payouts. VIG’s underlying index tracks dividend stocks with a minimum 10 years worth of dividend growth behind them. Its portfolio includes many standard names, like Microsoft (MSFT) and 3M (MMM). The index, however, does not include REITs or MLPs.
The fund’s current yield of 2.33% is designed to grow over time as more of these firms hand over more cash year in and year out. This makes VIG a powerful and important tool for investors looking to fight inflation and keep the effects of interest rate hikes at bay.
And as a Vanguard fund, VIG’s expenses are dirt cheap. The nearly $20 billion ETF only charges a measly 0.10% in expenses.
Dividend ETFs to Buy: WisdomTree Total Dividend ETF (DTD)
When investors think about dividend stocks, their focus only seems to go toward large-cap stocks. That’s a real shame, as many smaller firms are dividend stalwarts in their own right. Small- and mid-caps benefit from the same positives as their larger twins — including lower volatility, strong financial discipline and growing revenues/profits.
So investors shouldn’t ignore them in their search for dividend income.
The WisdomTree Total Dividend ETF (DTD) offers a way for investors to play the entire spectrum of one ticker. This includes large- mid- and small-cap stocks. DTD tracks a proprietary smart-beta index that screens and weights firms by the amount of dividends they are projected to pay in the upcoming year. Currently there are roughly 1,450 stocks in the ETF.
And while the fund is still dominated by large-cap names — at 85% of assets — it still does provide some exposure to dividend stocks investors would most likely usually pass up.
As an added bonus, DTD pays its distributions monthly. That could be a great benefit for those investors in retirement who need to balance cash flows with investment gains.
DTD currently yields 2.94% and costs just 0.28% in expenses.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned stocks.