There are more than 2,600 different exchange-traded funds (ETFs) registered in the U.S. alone, so it is not hard to find one that fits your investing needs and goals. Whether you are looking for ETFs focusing on mega-caps or micro-caps, growth or value, technology or financial -- or anything in between -- there are funds for that. That includes ETFs specifically designed to generate dividend income.
If you are a retiree looking for quarterly dividend payouts to supplement your income, here are two great options.
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1. Vanguard High-Dividend Yield Index ETF
ETFs pay out quarterly dividends just like individual stocks do, but there are differences. As equity ETFs are composed of a basket of stocks, the dividend payout is based on the dividends distributed within the underlying stocks, calculated on a pro-rata basis. As such, the dividend will fluctuate somewhat.
But the Vanguard High-Dividend Yield Index ETF (VYM 0.84%) is designed to maximize the dividend by tracking the Financial Times Stock Exchange (FTSE) High Dividend Yield Index, which includes stocks from the FTSE All-World Index with higher-than-average dividend yields. There are 410 stocks in this portfolio with JPMorgan Chase, Johnson & Johnson, and Home Depot as the three largest holdings. Financial stocks make up the largest portion of the portfolio at 23%.
The ETF currently pays out a quarterly dividend of $0.75 per share with a yield of 2.74%, which is much higher than the average yield on the S&P 500 (roughly 1.3%). It has had annual dividend growth for the past 11 years, averaging about 6.8% per year over the past five years. This year, the annual payout per share is about $2.95. So, a $10,000 investment in this ETF would buy you about 94 shares, which would net you about $70 per quarter in income.
But you also must consider the long-term returns of this ETF. It has posted a 13% annualized return over the past 10 years through Oct. 31. Also, its one-, three-, and five-year annualized returns as of Oct. 31 are 40.5%, 12.8%, and 12.3%, respectively.
So, while it is paying out a high dividend yield, it is also generating share price returns that beat that of the S&P 500. It also has a low expense ratio of 0.06%.
2. SPDR S&P Dividend ETF
The SPDR S&P Dividend ETF (SDY 0.91%) is much more concentrated than the Vanguard High-Yield Dividend Index. It tracks the S&P High-Yield Dividend Aristocrats Index but it includes more stocks than are in that particular fund, allowing companies that have had annual dividend increases for 20 consecutive years or more (Dividend Aristocrats require at least 25 straight years of dividend increases). The SPDR S&P Dividend ETF includes 118 stocks and each of these companies has consistently been able to raise its dividend. The fund itself has seen annual dividend increases for seven straight years, with the dividend rising at a five-year compound annual growth rate of 11%.
The three largest holdings in this ETF are AT&T, ExxonMobil, and Chevron -- all currently Dividend Aristocrats. Consumer staples stocks make up 16% of the portfolio, while financials and industrials are next at 15.6% and 15.4%, respectively.
Currently, the ETF pays out a quarterly per-share dividend of $0.85 with a yield of 2.75% -- similar to the Vanguard ETF. It has an annual payout of $3.41 per share. A $10,000 investment in this ETF would buy you about 82 shares, and, like the Vanguard ETF, would pay out about $70 per quarter based on the current dividend.
This ETF also has excellent long-term returns, returning about 13% on an annualized basis over the past 10 years through Oct. 31. For the one-, three-, and five-year periods it has posted annualized returns of 37.5%, 13%, and 12.4%, respectively. The expense ratio of 0.35% is a bit higher than the Vanguard ETF's.
These are two of the best dividend-producing ETFs on the market -- great for retirees not only for the income but also for their market-beating returns.
