Breaking Down Dividend ETFs

For much of stock market history, dividends were a key variable investors considered when deciding which stocks to buy.  

Dividends allow investors to directly tap into a company’s profits and generate a return from their investment that’s separate from share price appreciation.    
   
The importance of dividends has waxed and waned over time, with revenue and profit growth sometimes taking precedence over current income, but there’s always been a large segment of investors who prioritize regular distributions over everything else.  

That holds true today. Investing in stocks based on dividends is a popular strategy—one that investors can get exposure to through exchange-traded funds. 

Dividend ETFs Inflows Slowed After Record 2022

There’s currently $373 billion invested across 168 dividend ETFs, according to etf.com data, and investors added a record $62 billion to dividend ETFs in 2022, Bloomberg data shows. 

Those inflows fell to less than $1 billion in 2023 as soaring bond yields reduced the appeal of dividend-paying stocks.  

However, unlike yields on bonds, dividends usually grow over time, which is a key advantage that dividend stocks and ETFs have over bonds and bonds ETFs. Dividend ETFs also provide investors with exposure to stocks and the upside price appreciation potential that comes with it.

That said, dividend ETFs are not exactly comparable to bonds, and they do have their drawbacks. The risk and reward characteristics of these investment vehicles are quite different. Perhaps most importantly, dividend ETFs expose investors to potential equity market declines. 

Still, for investors who can look past the volatility of equities, dividend ETFs are a viable alternative to fixed income for generating yield.  

This guide will go over the different types of dividend ETFs that are available to investors as well as the performance of the top dividend ETFs over various time periods.

Two Main Strategies

Most dividend ETFs focus on one of two strategies—high yield or dividend growth. Like many segments of the ETF market, the dividend space is top-heavy. Of the $373 billion invested in U.S.-listed dividend ETFs, the top 10 funds account for 72% of these assets.  

The biggest of them all is the $70 billion Vanguard Dividend Appreciation ETF (VIG). VIG targets dividend growth, holding stocks of U.S. companies that have grown their dividends for at least 10 consecutive years. The focus on dividend growth as opposed to high yields is an important distinction.   
   
VIG’s 30-day SEC yield of 2% is only modestly higher than the Vanguard S&P 500 ETF (VOO)’s equivalent yield of 1.6%.  

But VIG’s underlying holdings have managed to increase their dividends much more consistently than the broader S&P 500, which results in higher yields over time.  

The Vanguard High Dividend Yield ETF (VYM), which has $48.1 billion in AUM, takes the other dividend approach. VYM’s sole focus is yield, not growth. It simply holds the portion of the market with the highest dividend yields and then market-cap-weights them. The result is a juicier 3.4% yield at the expense of the long-term growth of that yield.  

The eight largest dividend ETFs after VIG and VYM all offer some form of high yield or dividend growth and use various selection criteria.

SPDR S&P Dividend ETF (SDY) only holds stocks of firms that have increased dividends over the past 20 years, while the First Trust Value Line Dividend Index Fund (FVD) includes an equal-weighted basket of dividend stocks, and the iShares Core High Dividend ETF (HDV) only holds stocks of companies with high earnings potential and dividend sustainability.    
 

Largest Dividend ETFs  

Varying Returns  

The differing strategies have led to varying returns for dividend ETFs. The top 10 best-performing dividend ETFs have five-year annualized returns ranging from 10.4% to 14.2%.

The Siren DIVCON Leaders Dividend ETF (LEAD) leads the pack. The fund bolstered its returns by picking dividend stocks with a strong likelihood of increasing their dividends over the next twelve months. 

It’s a unique twist on dividend investing that’s paid off. 

Meanwhile, on a one-year basis, the SPDR S&P Emerging Markets Dividend ETF (EDIV) tops the list with a 33.6% gain, while on a ten-year basis, the First Trust NASDAQ Technology Dividend Index Fund (TDIV) is in the lead with a 12.4% annualized return.  

You can find the dividend ETF that’s right for you with etf.com’s screener.    
   
First, select “Dividend ETFs” under “etf.com Topics” on the left-hand side of the screen. 

From there, you can narrow the universe of dividend ETFs further by adjusting the available filters. The resulting funds can be sorted by performance, flows and other factors.  

Dividend ETF 5-Year Annualized Performance