Dividend ETFs vs Dividend Stocks: Comparison Guide

Should you invest in dividend ETFs, or is it better to invest in dividend stocks? As always, the answer depends on several factors, including an investor’s financial goals, risk tolerance and investing style. 

Read on to learn the similarities, differences and risks of dividend ETFs versus dividend stocks. 

Dividend ETFs vs Dividend Stocks: The Basics 

Dividend ETFs and dividend stocks have multiple similarities, such as income generation and overall market risk, but depending on the specific ETF or stocks chosen by the investor, there can be differences in yield, risk and performance between these two investment security types. 

Here are the basics on dividend ETFs and dividend stocks: 

What Is a Dividend ETF? 

A dividend ETF is an exchange-traded fund that invests in a collection of dividend-paying stocks. The ETF is designed to track the performance of an underlying index, such as the S&P 500 Dividend Aristocrats or the Dow Jones Select Dividend Index, which are composed of companies with a history of consistently paying and increasing their dividends over time. 

Dividend ETFs also offer the benefits of an ETF, such as ease of trading on an exchange, diversification, low expense ratios and tax efficiency. For example, by investing in a dividend ETF, investors can gain exposure to a diversified portfolio of companies that have a history of paying dividends, which can provide a steady stream of income.  

What Is a Dividend Stock? 

A dividend stock is a stock issued by a company that regularly pays a portion of their profits to shareholders in the form of dividends. Dividends are typically paid out quarterly, although some companies may pay them out annually or semiannually. Dividend stocks are usually issued by well-established, financially stable companies with a history of paying dividends. 

Investing in dividend stocks can provide investors with a source of regular income, as well as the potential for long-term capital appreciation. Dividend stocks are often favored by income-seeking investors and those with a more conservative investment strategy, as they tend to be less volatile than growth stocks or other types of stocks. 

When investing in dividend stocks, it's important to carefully consider the company's financial health and dividend history, as well as broader market conditions and the overall risk of the investment. Additionally, investors should be aware that dividends are not guaranteed and can be reduced or eliminated by the company at any time. 

Dividend ETF vs Dividend Stock Performance 

In general, whether dividend ETFs outperform individual stocks or not depends on the specific stocks in the ETF, the investment strategy of the ETF and the market conditions at any given time. While a single dividend stock can outperform a basket of dividend stocks, individual stocks also have the potential for underperformance compared with an ETF. 

For example, dividend ETFs can provide investors with exposure to a diversified portfolio of dividend-paying stocks, which can help to reduce risk and provide a reliable source of income. However, dividend ETFs may not offer the same level of potential return as investing in individual stocks that have the potential to grow rapidly in value.

Top Dividend ETF List by AUM 2024

Data as of August 1, 2024. Past performance is no guarantee of future results. For more detail on the top dividend ETFs see our comparison guide for Vanguard's VIG vs Schwab's SCHD.

Dividend ETF vs Dividend Stock Similarities 

Dividend ETFs and dividend stocks share some similarities, including: 

• Trading: Both dividend ETFs and stocks are traded on public exchanges, and their prices fluctuate based on supply and demand in the market. 
• Income potential: Both dividend ETFs and stocks have the potential to generate income for investors. Stocks can provide income through dividends, and dividend ETFs can provide income through the dividends paid by the underlying stocks. 
• Risk: Both dividend ETFs and stocks involve some level of risk. The value of a stock or a dividend ETF can go up or down based on a variety of factors, including the performance of the underlying company or companies, economic conditions and market trends. 
• Liquidity: Both dividend ETFs and stocks are highly liquid investments, which means that they can be bought and sold easily on public exchanges. 

Dividend ETF vs Dividend Stock Differences 

Dividend ETFs and stocks have several differences, including: 

1. Diversification: Dividend ETFs invest in a portfolio of stocks, while individual stocks represent ownership in a single company. This means that dividend ETFs provide investors with greater diversification, which can help to reduce risk. 
2. Income consistency: Dividend ETFs are designed to provide consistent income to investors through the dividends paid by the underlying stocks. While individual stocks may also pay dividends, their dividend payouts can be less consistent than those of dividend ETFs. 
3. Expense ratios: Dividend ETFs typically have lower expense ratios than actively managed funds, and may have lower expenses and trading costs than buying a diversified portfolio of individual dividend stocks.  
4. Management: Dividend ETFs are managed by professional fund managers who make decisions about which stocks to include in the ETF and when to buy or sell those stocks. Individual stocks, on the other hand, require investors to make their own investment decisions. 
5. Risk: While dividend ETFs provide greater diversification and may be less risky than individual stocks, they are still subject to market risk and can experience declines in value.

Dividend ETFs vs Dividend Stocks: The Risks 

Dividend ETFs and individual dividend stocks have different characteristics and risks, and investors should carefully consider their investment goals and risk tolerance before deciding which type of investment is right for them. 

Here are some risks specific to each: 

Risks of Dividend ETFs 

• Market risk: The value of dividend ETFs can fluctuate based on market conditions and the performance of the underlying stocks in the ETF. 
• Sector concentration risk: Some dividend ETFs may be heavily concentrated in certain sectors, which can increase risk if those sectors experience a downturn. 
• Interest rate risk: Rising interest rates can negatively impact dividend ETFs, as higher rates can make other income-generating assets more attractive to investors. 

Risks of Dividend Stocks 

• Market risk: The value of a stock can fluctuate based on overall market conditions and economic factors, such as changes in interest rates, inflation or geopolitical events.  
• Company-specific risk: The value of a single stock can be impacted by company-specific factors, such as poor financial performance, management changes or negative news. This risk can be magnified if an investor has a concentrated position in a single stock. 
• Dividend reduction or elimination: Companies can reduce or eliminate their dividends for a variety of reasons, such as changes in the business cycle or financial difficulties. This can result in a decrease in income for investors and a decline in the value of the stock. 
• Interest rate risk: Dividend stocks can be sensitive to changes in interest rates, particularly if a stock has a high dividend yield. When interest rates rise, income-generating assets such as bonds become more attractive, which can lead to a decline in the stock price. 

Should You Invest in Dividend ETFs or Dividend Stocks?

Dividend ETFs can be a good option for investors looking for a low-cost, diversified and reliable source of income from their investments. Dividend stocks may be a better option for investors who prefer to choose their own investments. Ultimately, deciding which is the best choice comes down to the individual investor’s financial goals, risk tolerance and investing style. 

Investors who may benefit from investing in dividend ETFs include: 

• Retirees and income-seeking investors: Dividend ETFs can provide a regular stream of income, making them a good choice for retirees or other investors who rely on their investments for income. 
• Long-term investors: Investing in dividend ETFs can be a good way to build long-term wealth, as the dividends paid out by the underlying stocks can be reinvested to purchase additional shares of the ETF. 
• Risk-averse investors: Dividend ETFs can be less risky than individual stocks, as they provide exposure to a diversified portfolio of stocks across multiple sectors. This can help to reduce the risk of any one stock having a significant impact on the overall performance of the ETF. 
• Passive investors: Dividend ETFs are passively managed, which means that investors don't need to spend a lot of time researching and analyzing individual stocks. 
• Investors looking for low-cost investments: Dividend ETFs typically have lower expense ratios than actively managed funds and may have lower expenses than buying a diversified portfolio of individual stocks. 

Investors who may benefit from investing in dividend stocks include: 

• Do-it-yourself investors: Dividend stocks may be a better choice for investors who prefer to select their own investments as opposed to buying a professionally managed fund. 
• Income-seeking investors: Dividend stocks can provide a regular stream of income, making them a good choice for investors who are seeking to generate income from their investments. 
• Long-term investors: Investing in dividend stocks can be a good way to build long-term wealth, as the dividends paid out by the stocks can be reinvested to purchase additional shares of the stock. 
• Value investors: Dividend stocks can be a good choice for investors who are looking for undervalued stocks that may have strong fundamentals and a history of paying dividends. 
• Risk-averse investors: Dividend stocks can be less risky than growth stocks or other types of stocks, as they typically have a more established track record of stable earnings and dividends. 
• Contrarian investors: Dividend stocks that have experienced a temporary decline in share price may be undervalued, providing an opportunity for contrarian investors to purchase the stock at a discounted price. 

Bottom Line on Dividend ETFs vs Dividend Stocks

Dividend ETFs and dividend stocks can both generate income and provide long-term growth for investors. However, they both carry similar degrees of market risk. Therefore, the choice of ETFs versus stocks comes down to an investor’s personal preferences, investing goals and tolerance for risk. Some investors, such as long-term investors with high risk tolerance, may prefer to avoid dividend investments altogether and focus on growth ETFs or growth stocks instead.