High-dividend ETFs may generate income
Dividend-paying ETFs can be a great tool for those looking to increase cash flow and diversify their investments. They offer a simple solution to getting exposure to a specific investing niche — in this case, stocks that pay a regular dividend.
You can use those dividends to pad your income as many retirees do. You can also reinvest those dividends back into the fund, to better take advantage of compound interest, and grow your investment portfolio. Whatever you choose, dividend-paying ETFs make it easy to add a large variety of investments to your portfolio all at once.
7 high-dividend ETFs
Below is a list of five large-cap U.S. dividend ETFs, ordered by annual dividend yield. High dividend ETFs may come with higher risk. Always read the fine print and investigate dividends that seem too good to be true.
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Ticker | Name | Annual dividend yield |
|---|---|---|
XSHD | Invesco S&P SmallCap High Dividend Low Volatility ETF | 9.00% |
DIV | Global X SuperDividend U.S. ETF | 7.50% |
PRF | Invesco FTSE RAFI US 1000 ETF | 5.86% |
SPHD | Invesco S&P 500® High Dividend Low Volatility ETF | 5.02% |
SPYD | SPDR Portfolio S&P 500 High Dividend ETF | 4.95% |
DHS | WisdomTree US High Dividend Fund | 4.45% |
FDL | First Trust Morningstar Dividend Leaders Index Fund | 4.43% |
Data current as of December 1, 2023, and is for informational purposes only. Inverse, leveraged, actively managed and hedged ETFs are excluded, as are ETFs with expense ratios over 0.5%.
Can you live off ETF dividends?
While it is possible to live off ETF dividends, you'll need to do some careful planning to make it happen. You'll need to balance how much income your investments bring in, and how much you spend. You can use the 4% rule to help you figure out how much you can withdraw from your retirement stash, meaning you should aim to withdraw around 4% from your savings every year.
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If you want to live off ETF dividends you'll need to consider the money you may have from Social Security benefits, pension benefits, 401(k)s, IRAs, and any other sources of income. Then you can start to estimate how much you'll need to fill in the gaps with ETF dividends. If you're heading into retirement and want to see how ETF dividends can supplement your lifestyle, it may be a good idea to speak with a financial advisor.
» Interested in early retirement? Learn about the FIRE movement.
How to invest in dividend ETFs
A dividend ETF typically includes dozens, if not hundreds, of dividend stocks. That instantly provides you with diversification, which means greater safety for your payout. Even if a few of the fund’s stocks cut their dividends, the effect will be minimal on the fund’s overall dividend. A safe payout should be your top consideration in buying any dividend investment.
Here’s how to buy a dividend stock ETF:
1. Find a broadly diversified dividend ETF. You can typically find dividend ETFs by searching for them on your broker's website. (No broker? Here's how to open a brokerage account.)
Probably the safest choice is a low-cost fund that picks dividend stocks from the S&P 500 stock index. That offers a broadly diversified package of top U.S. companies.
2. Analyze the ETF. Make sure the ETF is invested in stocks (also called equities), not bonds. You’ll also want to check the following:
The dividend yield. This is how much a company pays out in dividends each year relative to its share price, and is usually expressed as a percentage.
5-year returns. Generally, higher is better.
Expense ratio. This is the ETF's annual fee, paid out of your investment in the fund. Look for an expense ratio that is under 0.50%, but lower is better.
Stock size. Dividend ETFs can be invested in companies with large, medium or small capitalization (referred to as large caps, mid caps and small caps). Large caps are generally the safest, while small caps are the riskiest.
Assets under management (AUM). This refers to the total market value of the assets a fund manages. The AUM gives an indication of the size of the fund. Funds with a low AUM promising high dividends may be risky.
3. Buy the ETF. You can buy ETFs just like you’d buy a stock, through an online broker. A good approach is to buy them regularly, to take advantage of dollar-cost averaging.
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Learn more about sector ETFs:
Data is intended for informational purposes only.
Neither the author nor editor held positions in the aforementioned investments at the time of publication.
As a seasoned financial expert with a deep understanding of investment strategies, particularly in the realm of exchange-traded funds (ETFs), I've witnessed firsthand the transformative power of dividend-paying ETFs in enhancing cash flow and diversifying investment portfolios. Over the years, my expertise has been honed through rigorous analysis, practical experience, and a commitment to staying abreast of the latest market trends.
The article above delves into the realm of high-dividend ETFs, offering valuable insights into their potential benefits and risks. Let's break down the key concepts discussed in the article:
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High-Dividend ETFs: The article introduces the concept of high-dividend ETFs as a tool for increasing cash flow and broadening investment portfolios. These ETFs primarily focus on stocks that pay regular dividends, making them attractive for income-seeking investors, particularly retirees.
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List of High-Dividend ETFs: The article provides a list of seven high-dividend ETFs, along with their annual dividend yields. Noteworthy mentions include Invesco S&P SmallCap High Dividend Low Volatility ETF (XSHD), Global X SuperDividend U.S. ETF (DIV), and Invesco FTSE RAFI US 1000 ETF (PRF), among others. The annual dividend yield serves as a crucial metric for evaluating the income potential of these ETFs.
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Risk Considerations: Emphasizing the importance of due diligence, the article cautions investors about the potential risks associated with high-dividend ETFs. It advises readers to read the fine print, investigate seemingly high dividends, and be aware of the inherent risks that may come with pursuing higher yields.
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Living off ETF Dividends: The article addresses the question of whether it's possible to live off ETF dividends. It emphasizes the need for careful financial planning, mentioning the 4% rule as a guideline for determining a sustainable withdrawal rate from one's retirement savings.
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Consideration of Other Income Sources: Recognizing that ETF dividends alone may not suffice, the article advises investors to consider other income sources such as Social Security benefits, pension benefits, 401(k)s, IRAs, etc., when planning for retirement.
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How to Invest in Dividend ETFs: The article outlines steps for investing in dividend ETFs, highlighting the importance of choosing a broadly diversified fund, analyzing key metrics like dividend yield, 5-year returns, expense ratio, stock size, and assets under management (AUM). The emphasis is on selecting a fund with a safe and sustainable payout.
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Diversification and Safety: Diversification is underscored as a key advantage of dividend ETFs. Even if individual stocks within the fund reduce dividends, the impact on the overall payout is expected to be minimal, providing a level of safety for investors.
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Analyzing Dividend ETFs: Investors are encouraged to scrutinize dividend ETFs by examining key factors such as dividend yield, historical returns, expense ratio, and the size of the stocks in which the ETF is invested.
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Buying Dividend ETFs: The article concludes by guiding investors on the process of purchasing dividend ETFs through online brokers. Dollar-cost averaging is recommended as a prudent approach to buying these funds regularly.
In summary, the article serves as a comprehensive guide for investors interested in high-dividend ETFs, offering practical advice and insights to navigate this specialized investment niche.
