In this article, I present 3 ETFs for easy dividend investing.
As we saw in previous articles, some companies pay you to hold their stock: The dividend is the distribution of their profits to shareholders.
Dividends are an excellent way to generate passive income.
But how can you easily start investing in dividend paying stocks without having to spend hours analyzing companies to invest in the right ones?
Simple: by buying dividend-paying ETFs.
In this article, I present 3 ETFs that allow you to easily start collecting dividend payments, with minimal risk. The three ETFs are ranked from lowest yield to highest yield.
Reminder: What is an ETF?
An ETF is a basket of stocks that seeks to reproduce the performance of a benchmark index. The benchmark index can be a stock market, such as the S&P 500 or the Nasdaq, or a particular sector, such as technology, energy or healthcare.
Investing in ETFs offers numerous advantages:
- Diversification: ETFs offer great diversification because you hold dozens, if not hundreds, of stocks in the same portfolio. This is less risky than owning individual stocks.
- Passive investing: The investment fund manages and rebalances the portfolio so you don’t have to do anything.
- Flexibility: ETFs are traded on stock exchanges like stocks so you can buy or sell shares at any time
- Transparency: The ETFs holdings are public information.
- Low fees: ETFs have very low fees, which ensures that the benchmark index’s returns are closely tracked.
The final great advantage of dividend ETFs is the dividend safety they offer. You receive your dividends even in times of crisis. Since your ETF is composed of dozens, if not hundreds of companies, you will still receive dividends if some companies eliminate theirs. Receiving dividend payments during downturns and bear markets is a very pleasant experience.
Now that we know what ETFs are and why they’re awesome, here are the 3 ETFs for easy dividend investing.
1 – iShares S&P 500 Core ETF (ticker: IVV)
IVV reproduces the performance of the 500 largest American companies listed on the S&P 500. At writing, there are exactly 506 companies in IVV’s portfolio.
This is the perfect ETF for beginners looking to invest in a low-risk and well diversified product geared for long-term growth.
The dividend is modest and should be considered a cherry on top of the cake.
This ETF’s portfolio is heavily weighted towards growth stocks with a high market capitalization.
As a result, in the top 10 holdings alone, half of the companies don’t pay a dividend:
- Pays a dividend:
- Apple (0.6% yield)
- Microsoft (1% yield)
- Johnson & Johnson (2.5% yield)
- JP Morgan (2.5% yield)
- Does not pay a dividend:
- Berkshire Hathaway
Ideally, an ETF should not be too concentrated on a single sector. However, technology companies make up more than 25% of the total portfolio.
This is explained by the high growth rate of the technology sector, which is poised to continue over the next several decades.
Nonetheless, all things considered, there is decent diversification in healthcare, consumer discretionary, communication, finance and industry.
c) The Dividend
The dividend yield of 1/5% is relatively modest but:
- The dividend’s average annual growth rate of 10% is high
- The 10-year price appreciation of 193% is very good.
Thus, the dividend is steadily rising every year, which increases your yield on cost, and the capital gains are good. Obviously, the coronavirus pandemic caused the dividend to decrease in 2020, but a solid dividend was still paid out to shareholders
IVV is the ideal ETF for beginners who want a mix of long term price appreciation and dividend growth with minimal risk. The ETF is well diversified, the growth is steady and the dividend is reliable and growing healthily. This is the perfect product to buy if you’re just starting your investment journey.
2 – Proshares S&P 500 Dividend Aristocrats ETF (ticker: NOBL)
NOBL tracks the performance of the S&P 500 Dividend Aristocrats. Dividend Aristocrats are companies who have increased their dividend at least once a year for the past 25 consecutive years. Some companies in this ETF have increased their dividends for over 40 years. Thus, it’s focused on companies with an immaculate dividend growth record.
The 65 companies of this ETF are major conglomerates who:
- Generate steady revenues
- Are growing slowly, albeit steadily
- Have solid fundamentals
- Generate substantial profits year in year out
Furthermore, their dividend growth record demonstrates their ability to weather turbulent market conditions. In sum, this ETF gives youe exposure to some of the world’s best managed companies who put shareholder value at the core of their mission statement.
As you can see, the top 10 companies held in the portfolio have impressive dividend records.
Feel free to look up the complete holdings of this ETF. You’ll see that all of the companies have similar dividend growth records.
c) The Dividend
The current dividend yield is roughly 2.5%, which appears low, but consider that:
- The Dividend’s 10-year average annual growth rate is 11.5%, which is very high
- The 10-year capital gains is 232%, which is also very high.
This ETF is an excellent choice for investors who want to exclusively own S&P 500 Dividend Aristocrats. The reliable dividend, the high dividend growth rate and the solid price appreciation offers the best of both worlds: a steady increase of your yield on cost and enticing capital gains.
3 – iShares Core High Dividend ETF (ticker: HDV)
HDV tracks the performance of American companies who pay out a relatively high dividend yield. In order to minimize risk, iShares screens the companies to ensure they have the financial capacity to honor the dividend payments.
This ETF is geared towards investors seeking a high level of income.
As you can see, the companies in this portfolio have relatively high dividend yields and good histories of dividend growth:
- Exxon Mobil: 7% yield, 38 years of dividend growth
- AT&T: 7% yield, 36 years of dividend growth
- Johnson & Johnson: 2.5% yield, 58 years of dividend growth
- Chevron: 5.4% dividend yied, 33 years of dividend growth
- Verizon: 4.4% dividend yield, 16 years of dividend growth.
If you look at all the holdings, you will find familiar names who all boast relatively high dividend yields and impressive dividend growth histories.
The ETF is relatively well diversified, although we do notice heavy concentration in the following sectors:
- Energy and Healthcare make up more than 40% of the portfolio
- Communication and consumer discretionary make up more than 25% of the portfolio.
Thus, four sectors make up more than 65% of this ETF’s portfolio.
Obviously, this is far from ideal. However, since these sectors that are well known for their high dividend yields, it’s only natural that they make up the vast majority of the portfolio.
Some investors will point out that heavy concentration in energy is far from ideal considering that many countries are transitioning to renewable energy. This is true but oil and gas will cotinue to play an important role in the world economy for the next decade at the very least. Further, since ETFs are regularly rebalanced, energy companies will be excluded from the portfolio if they drastically reduce their dividend payments, and they will be replaced with other high dividend yield companies.
c) The Dividend
The 4% dividend yield appears low but:
- The dividend’s 5-year average annual growth rate is 4.3%
- Stock price appreciation since 2011 is 77.5%
- 4 consecutive years of dividend growth
Keep in mind that high quality companies pay out relatively low dividend yields. Thus, 4% dividend, which appears low at face value, is rather incredible considering the quality of the companies in this portfolio.
Also, you should not expect this ETF to provide impressive dividend growth. These companies are very mature and already pay out a majority of their earnings as dividends. They cannot reasonably increase their dividends by double digit numbers without jeoperdizing their long-term prospects.
Lastly, while the price appreciation is very modest, it is still decent and nothing to scoff at.
This ETF is perfect for investors seeking income. The price appreciation is modest but the dividend yield is high and steadily increasing every year. It’s perhaps best suited for older investors seeknig to complement their retirement income; younger investors should seek more capital appreciation by buying NOBL.
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DISCLAIMER: This article is the fruit of my personal research and should not be viewed as financial advice. I enjoy analyzing stocks and providing investment ideas but I highly encourage you to conduct your own research before investing in any asset. NEVER invest without having done proper due diligence and NEVER invest out of the Fear Of Missing Out (FOMO). Also, NEVER invest because some internet message boards are hyping up a high-flying stock. As a rule of thumb, the number of rockets included in a tweet are inversely proportional to the quality of the advice given.