ETFs can offer income, too.
There are many ways to slice up the stock market using exchange-traded funds. Whether you're looking for a cost-efficient way to buy a wide swath of dominant U.S. companies or you want to invest in specific trends such as cybersecurity, chances are there's a fund for that strategy. Also, income investors can use ETFs to tap low-risk stocks that pay generous dividends. Whether your focus is big companies or small, domestic corporations or international ones, there are ETFs where income-oriented investors can find investments that pay more than the average S&P 500 index component. Here are nine ETFs that pay you, and why they are worth a look.
Vanguard High Dividend Yield ETF (ticker: VYM)
One of the largest dedicated income funds, VYM commands more than $22 billion in total assets under management. That scale allows VYM to keep costs low with an expense ratio of 0.08 percent, or just 8 cents annually on every $10,000 invested. That's an incredibly low fee structure for a fund that holds almost 400 popular dividend stocks including Johnson & Johnson (JNJ) and Exxon Mobil Corp. (XOM). With a 30-day yield significantly above the average yield of about 2 percent for the components of the S&P 500, investors in this ETF get similar large-cap diversification but with a focus on income and stability.
Current yield: 3.6 percent
iShares Select Dividend ETF (DVY)
This iShares fund, comprised of just under 100 components, employs a different strategy on large-cap dividend payers. The methodology looks at a five-year window of dividend history, instead of prioritizing the yield at present day like other funds. The result is an interesting list of stocks including utility PPL Corp. (PPL) and under-the-radar energy pick Oneok (OKE). The fund is not market-cap weighted, either, striving to put roughly 2 percent of assets in each position rather than relying on a handful of the bigger names on Wall Street.
Current yield: 3.3 percent
ProShares S&P 500 Aristocrats (NOBL)
This fund fully embraces the idea that dividend stocks with a long history of payouts are the most likely to deliver consistent income potential going forward. NOBL is focused on dividend aristocrats, publicly traded corporations that have at least 25 consecutive years of dividend increases, and frequently have a history of uninterrupted payments that stretches much longer. Holdings include insurance company Aflac (AFL) and lesser-known firms like Cincinnati Financial Corp. (CINF) that may get overshadowed by some stocks with bigger names. Just be aware that while the dividend increases are consistent, they often aren't very substantial -- thus the overall yield is actually lower than the previous funds.
Current yield: 2.8 percent
WisdomTree U.S. Dividend Growth Fund (DGRW)
Another strategy is to seek reliable dividend payers that also consistently increase their distributions. This WisdomTree ETF applies qualitative screening metrics to the typical index of large-cap dividend stocks to identify those with the best dividend growth records. With almost 300 holdings, the list includes old favorites for income investors like Verizon Communications (VZ) as well as smaller companies such as Emerson Electric (EMR). Interestingly, the current yield of DGRW is not incredibly attractive. However, the consistent growth in payouts could pay off in the future.
Current yield: 2.4 percent
Invesco Preferred ETF (PGX)
For consistent income, it may be worthwhile to consider preferred stock in your portfolio. Preferred stock is a unique asset class different from common stock that is traded on major exchanges like the New York Stock Exchange and Nasdaq composite, and is a hybrid instrument where investors get more share price stability but less certainty than with corporate bonds. Most investors can never access individual preferred shares on their own, however. That makes this Invesco fund appealing both for the generous yield but also for the ability to tap into an alternative investment for true diversification across asset classes.
Current yield: 5.7 percent
iShares International Select Dividend ETF (IDV)
Speaking of diversification, all the funds mentioned thus far have been centered around domestic dividend payers. Any investor who has explored dividend stocks in developed markets overseas knows that many companies in Europe and Japan have a rich history of serving income investors, including public pension plans. Besides, many of these global stocks are really multinational players not limited to their home nations. Familiar names include U.K.-based pharmaceutical giant GlaxoSmithKline (GSK). Others, like the nearly $130 billion commonwealth Bank of Australia (CMWAY), may not be household names but are as reliable as the domestic dividend stocks you know -- and offer even greater yield.
Current yield: 5.3 percent
WisdomTree U.S. MidCap Dividend ETF (DON)
Another powerful way to add an income focus is simply to go one step down into mid-cap stocks -- that is, stocks that are valued at $10 billion or less. WisdomTree's DON fund lets investors access stocks that fit this strategy. Some of the component stocks are actually pretty popular investments you may know recognize such as retailer L Brands (LB), the parent of Victoria's Secret, or jam purveyer J.M. Smucker Co. (SJM). But the top 10 holdings represent about 10 percent of the portfolio, so this is truly a wider look at the universe of dividend payers than a typical fund targeting a few big names.
Current yield: 2.9 percent
WisdomTree U.S. SmallCap Dividend ETF (DES)
Investors can focus even smaller with the DES fund, which caps companies at around $2 billion in market value. You may still find names you know like Tupperware Brands Corp. (TUP), but chances are the most popular large-cap equity funds don't overlap with the components here. And with a nearly 4 percent yield, smaller size doesn't mean smaller payouts. It's worth noting that small-cap stocks tend to be very domestic in their focus, since they lack the deep pockets and connections of large corporations with multinational footprints. That means any potential trouble from a trade war or global slowdown will be mitigated.
Current yield: 3.9 percent
Invesco S&P 500 High Dividend Low Volatility ETF (SPHD)
If your primary motivation in seeking out dividend stocks is less about income and more about reliability and stability, then consider the SPHD fund. This unique ETF uses selective screening to find stocks that not only are paying above average dividends, but also that tend to "wiggle" less than their peers and exhibit stable share prices even in rough market environments. Particularly with the volatility seen recently, this strategy can be appealing. Picks include Welltower (WELL), a real estate investment trust focused on health care. These companies may not be as notable as high-growth names in tech, but they offer stability as well as dividends to see you through.
Current yield: 4.3 percent
These ETFs offer great dividend yields.
Here is a list of nine ETFs that pay above-average dividends.
-- Vanguard High Dividend Yield ETF (VYM)
-- iShares Select Dividend ETF (DVY)
-- ProShares S&P 500 Aristocrats (NOBL)
-- WisdomTree U.S. Dividend Growth Fund (DGRW)
-- Invesco Preferred ETF (PGX)
-- iShares International Select Dividend ETF (IDV)
-- WisdomTree U.S. MidCap Dividend ETF (DON)
-- WisdomTree U.S. SmallCap Dividend ETF (DES)
-- Invesco S&P 500 High Dividend Low Volatility ETF (SPHD)
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