It’s tricky getting a dividend portfolio right. Most income seeking investors tend to focus exclusively on the yields. The higher the yield the greater the temptation to invest. After all, dividends are considered rock-solid streams of income. As long as the company keeps making money, your dividends will keep rolling in. This dividend investing guide makes it easy to build your portfolio with our top 10 dividend stocks.
But dividend stocks are not as stable as bonds or fixed income bank accounts. The company paying them can suddenly decide to cut the rate. A dividend-paying firm, like any other business, could fall on hard times. When it does, the management team must decide whether to keep paying the same dividends as before, or cut the rate to preserve cash and pay down debt.
There’s simply no way to know for sure if your company will ever issue a profit warning or dividend cut. Some of the most well-known companies have done this in the past and caught investors off guard. A sudden cut in dividends is what keeps most income-seeking investors up at night.
But there is a way to aim for high yields and still sleep well at night. It’s called diversification. Spreading the cash into different companies reduces the risk that your dividend yield will cut drastically overnight.
To put it simply, imagine you have one egg in one hand and a basket of eggs in the other. The chances of that one egg falling are much higher than ALL the eggs in the basket falling together and cracking. By diversifying you reduce your exposure to a single company and spread out the risks. You can pick a range of dividend yield and achieve a great average rate of return over the course of a year.
If you’re just getting started with a new dividend portfolio for the first time, might I suggest you read our Basic Guide To Dividend Investing first. Once you’re done with that, you’ll realize the importance of diversification and the risks of aiming for higher yields.
At this point you may be gearing up to start picking dividend-paying stocks for your own portfolio. But what if I told you a well-diversified basket of excellent quality stocks was already available? Instead of sifting through thousands of different stocks and reading millions of annual reports, you could simply pick up an Exchange Traded Fund.
Exchange Traded Funds
Exchange traded funds or ETFs are very similar to mutual funds. They collect a basket of stocks and track them. This is used for all sorts of securities. Gold , bonds, stocks, indexes, all have ETFs dedicated to them. Investors can buy an ETF the way they would buy any other security on the market and get exposure to all the constituents of that ETF.
Dividend ETFs, as the name suggests, track dividend-paying stocks. A bunch of them are listed on the stock market and they each have a slightly unique collection of stocks and different yields to offer.
We’ve created a list of the five best dividend ETFs on the market to simplify this search. The list is constructed on the basis of the dividend yield, expense ratio, performance since inception, and portfolio turnover. In other words, here are the best performing, most affordable and most stable dividend ETFs:
Top 5 Dividend ETFs
1. Schwab U.S. Dividend Equity ETF (SCHD)
This Schwab tracks the Dow Jones U.S. Dividend 100 Index and offers a basket of stocks selected on the basis of a range of financial ratios. The ETF has a Beta of 0.86 and the Expense Ratio is barely 0.07%. This ETF is one of the best simply because it focuses on the consistency of dividend payment. If a firm pays a high dividend consistently for years, you can expect it to land on this ETF. The ETF has seen the rate of dividends grow 12.3% a year over the past three years.
2. Vanguard Dividend Appreciation ETF (VIG)
As of May, 2016, this ETF offers a dividend yield of just over 2.2%. Considering the expense ratio is 0.10% and beta is 0.87, this is a stable dividend paying ETF. It tracks the NASDAQ U.S. Dividend Achievers Select Index, which is made of a number of blue chip companies that have managed to raise dividends for ten years or more. The dividends from this ETF have grown 11.7% every year for the past five years.
3. iShares Core High Dividend ETF (HDV)
This is the perfect dividend ETF for income-seekers. It yields 3.6% and the beta is less than half of the market. Portfolio turnover is rather high, at nearly 67%, but the results speak for themselves. The ETF tracks the Morningstar Dividend Yield Focus Index and the dividends it offers has grown 11.2% every year for the past three years.
4. PowerShares S&P 500 High Dividend Low Volatility ETF (SPHD)
This is an ETF focused on reducing risk. It tracks the S&P 500 Low Volatility High Dividend Index, which basically consists of 50 stocks that offer high dividends but low betas. One-fifth of the index is invested in utility companies. The utility sector is widely considered the most stable on the market. The dividends are paid out every month, which makes this ETF ideal for regular income seekers. Over the past twelve months this ETf has seen dividends grow by 9%.
5. Vanguard High Dividend Yield ETF (VYM)
This is a special ETF since it tracks British stocks. These are useful for diversification because they offer a way to expose your assets to a foreign market. The ETF focuses on the best dividend payers on London’s FTSE 100. The actual index this is benchmarked against is the FTSE High Dividend Yield Index. This is a well-diversified index. No company makes up more than 16% of the overall portfolio and the ETF exposes your assets to over 400 companies. Dividends have grown at a compound annual rate of 14.5% since 2011. Dividend yield is currently higher than what is offered by the S&P 500 – 3.2%.
Even the best known companies and the highest earning firms underperform the market occasionally. Dividend investors often focus exclusively on the dividend yield. They forget that a company can suddenly cut the dividends paid out. There is simply no way to know if a company will keep paying or growing the dividends it pays right now.
Diversification is the only solution for this problem. By spreading out your assets you can achieve an attractive rate of return while keeping your risk low. A great way to get this diversification is by investing in ETFs.
ETFs track indexes of dividend paying stocks in the market. By buying a single dividend ETF from the list suggested above, you can expose your income-generating portfolio to hundred of different, dividend-paying stocks.This dividend investing guide makes it easy to build your portfolio with our top 10 dividend stocks.