Unless you’ve got a lot of free time, opting to invest with dividend ETFs instead of selecting individual stocks makes complete sense.
BusinessInsider.com recently profiled a former Swiss Banker who quit his job 10 years ago to live off dividends. At the time, Helmut Jonen was earning 300,000 Swiss Francs ($322,400). He told BusinessInsider.com he figured he’d need about 80% of his salary in dividends to reach financial freedom.
In 2023, he expects to earn more than 300,000 Euros ($317,486) from dividends. However, he spends two hours daily managing the 97 stocks and four ETFs he owns to deliver on his investments.
He readily admits that only people with lots of free time should invest in individual stocks. He is also increasing his exposure to dividend ETFs and moving away from stocks because they provide diversification without a significant time commitment.
As I said in the opening, dividend ETFs make a lot of sense. So here are my picks for your ETF version of the Coffee Can portfolio.
|VYM||Vanguard High Dividend Yield ETF||$107.54|
|VYMI||Vanguard International High Dividend Yield ETF||$62.05|
|REGL||ProShares S&P MidCap 400 Dividend Aristocrats ETF||$74.09|
Vanguard High Dividend Yield ETF (VYM)
By selecting the Vanguard High Dividend Yield ETF (NYSEARCA:VYM), I’m going against my usual philosophy that the dividend yield isn’t as crucial as the dividend growth. However, when you take a closer look at the inner workings of this domestic-focused ETF, you’ll see that it stays true to my philosophy.
So, VYM tracks the performance of the FTSE High Dividend Yield Index, a collection of U.S. stocks forecasted to have above-average yields. The stocks are ranked by their forecasted dividends for the next 12 months. The top half makes the cut. They are then weighted by market cap.
What you end up With is a collection of 441 stocks, identical to the number held by the index, whose companies have a median market cap of $140.2 billion and an earnings growth rate of 12.1% over the past five years.
Vanguard considers the ETF to be a large-cap value fund. It turns the fund’s entire $50.9 billion portfolio approximately once every 12 years. That’s one of the reasons it can charge just 0.06%.
The top 10 holdings account for 23% of the portfolio, so the average weighting of the remaining 431 stocks is a very low 0.18%. So if you don’t like the names in the top 10, VYM might not be for you.
The top three sectors by weight are financials (20.7%), health care (14.30%), and consumer staples (12.30%).
VYM yields 2.94%.
Vanguard International High Dividend Yield ETF (VYMI)
Vanguard International High Dividend Yield ETF (NASDAQ:VYMI) tracks the performance of the FTSE All-World ex US High Dividend Yield Index, which is essentially the non-U.S. version in terms of stock selection and weighting methodology.
VYM got its start in November 2006. VYMI launched a decade later, in February 2016. VYMI charges 16 basis points more than its U.S. stablemate. In addition, because it invests in both developed and emerging markets, it has three times the number of stocks in the portfolio, with 1,302.
The median market cap is $43.5 billion, with an earnings growth rate of 8.3% and a turnover rate of about double VYM at 16.1%. Its net assets are significant at $5.6 billion but considerably less than VYM.
VYMI’s portfolio invests in more than 43 countries. The top three sectors by weighting are the United Kingdom (13.4%), Japan (13.0%), and Australia (8.7%). Developed markets account for 79% of the portfolio, with emerging markets accounting for 21%.
It’s even more diversified than VYM. Its top 10 holdings represent just 14% of the portfolio. However, you should recognize almost all of these companies. The top three sectors by weight are financials (22.8%), industrials (14.1%), and consumer discretionary (10.3%).
VYMI yields 4.37%.
ProShares S&P MidCap 400 Dividend Aristocrats ETF (REGL)
I’m a big fan of mid-cap stocks. I always have been. In January, I picked three mid-cap dividend stocks to buy. Now it’s my turn to recommend three dividend ETFs to buy.
Considering the introduction, which discussed the time involved in selecting and managing individual stocks, it becomes even more complicated when dealing with mid-cap stocks. Although they are more mature than small caps, they still possess higher risk on average than large caps.
But you’ll never stop me from getting excited about mid-cap stocks. To me, they are the sweet spot in investing.
Given I’ve already included a large-cap U.S. dividend ETF and a large cap International dividend ETF, I couldn’t resist adding the ProShares S&P MidCap 400 Dividend Aristocrats ETF (BATS:REGL), which tracks the performance of the S&P MidCap 400 Dividend Aristocrats Index.
ProShares’ website states the ETF’s holdings “generally have had stable earnings, solid fundamentals, and strong histories of profit and growth.” The index restricts its holdings to companies that have increased their annual dividend for 15 consecutive years or more.
The premise is that dividend growth generally follows earnings growth. You usually only have the former with the latter.
REGL has 46 holdings invested across $1.7 billion in net assets. The weighted average market cap is $7.04 billion with a 2.2% dividend yield. Its top 10 holdings account for 22% of the portfolio.
The ETF gets a five-star rating from Morningstar.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.