Is it better to buy dividend stocks or dividend ETFs?
Dividend ETFs or Dividend Stocks: Which Is Better? 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.
Cons. No guarantee of future dividends. Stock price declines may offset yield. Dividends are taxed in the year they are distributed to shareholders.
Despite their storied histories, they cut their dividends. 9 In other words, dividends are not guaranteed and are subject to macroeconomic and company-specific risks. Another downside to dividend-paying stocks is that companies that pay dividends are not usually high-growth leaders.
ETF issuers collect any dividends paid by the companies whose stocks are held in the fund, and they then pay those dividends to their shareholders. They may pay the money directly to the shareholders, or reinvest it in the fund.
Dividend ETF | Assets under management | Expense ratio |
---|---|---|
Vanguard High Dividend Yield Index ETF (VYM) | $55 billion | 0.06% |
Vanguard Real Estate ETF (VNQ) | $34 billion | 0.12% |
iShares International Select Dividend ETF (IDV) | $4.2 billion | 0.51% |
Global X SuperDividend ETF (SDIV) | $760 million | 0.58% |
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.
ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses. Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than their NAV, and are not individually redeemed from the fund.
As part of a diversified portfolio, dividend stocks have their place. They offer relative stability, may pay increasing amounts over time and may provide steady income. But relying too heavily on dividend stocks as a primary investment approach could put you at risk and reduce your long-term investment gains.
While dividend ETFs can offer stable income, their growth potential is generally lower over the long run. That said, dividend ETFs may outperform the S&P 500 during particular time frames, such as during a recession or a period of easing interest rates.
Ticker | Name | Dividend Yield |
---|---|---|
T | AT&T | 6.72% |
WHR | Whirlpool | 6.69% |
CCI | Crown Castle | 6.58% |
VZ | Verizon | 6.57% |
Can you live off ETF dividends?
It's possible to live off the income from high-dividend ETFs, but it may take some planning. You can find high-dividend ETFs by analyzing the ETF selection in your brokerage account.
SCHD price and total return (including dividends) has outperformed VYM over a ten-year investment horizon (see chart below). Past performance is not indicative of future returns. VYM is better diversified, while SCHD has more holdings concentration risk. VYM has four times as many holdings as SCHD.
Types of dividends
Moreover, the investor must own the shares in the ETF paying the dividend for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. This means if you actively trade ETFs, you probably can't meet this holding requirement.
Symbol | Name | Dividend Yield |
---|---|---|
PEX | ProShares Global Listed Private Equity ETF | 12.14% |
SPYI | NEOS S&P 500 High Income ETF | 12.10% |
BTF | Valkyrie Bitcoin and Ether Strategy ETF | 12.08% |
SDIV | Global X SuperDividend ETF | 12.06% |
- Verizon Communications VZ.
- Johnson & Johnson JNJ.
- Philip Morris International PM.
- Altria Group MO.
- Comcast CMCSA.
- Medtronic MDT.
- Pioneer Natural Resources PXD.
- Duke Energy DUK.
Name | Price | Analyst Price Target |
---|---|---|
IBM International Business Machines | $181.58 | $192.58 (6.06% Upside) |
CVX Chevron | $160.00 | $185.20 (15.75% Upside) |
EOG EOG Resources | $133.17 | $147.29 (10.60% Upside) |
ET Energy Transfer | $15.77 | $18.44 (16.93% Upside) |
“One mistake to avoid,” Cabacungan says, “is to buy a company's stock simply because it issues a high dividend.” If the company has leveraged excessive debt to fund the dividend, it could come at the expense of future profitability and hurt growth prospects.
High-dividend ETFs invest in stocks with above-average dividends. In addition, some will use creative investment strategies such as covered-call writing to further enhance yield. High-dividend ETFs can be a great choice for income-oriented investors.
Stock-picking offers an advantage over exchange-traded funds (ETFs) when there is a wide dispersion of returns from the mean. Exchange-traded funds (ETFs) offer advantages over stocks when the return from stocks in the sector has a narrow dispersion around the mean.
Theoretically, for exotic ETFs, yes — but as a practical matter highly unlikely. And for broad market ETFs that track something like the S&P 500 Index the probability of going to zero is, well, about zero. Every stock in the index would have to go to zero.
What is the downside of an ETF?
Lack of liquidity
Liquidity refers to how easily — or quickly — an investor can buy or sell a security in a secondary market. If an ETF trades at low volume or at high volatility, an investor may have a hard time selling it.
ETFs may close due to lack of investor interest or poor returns. For investors, the easiest way to exit an ETF investment is to sell it on the open market. Liquidation of ETFs is strictly regulated; when an ETF closes, any remaining shareholders will receive a payout based on what they had invested in the ETF.
What Is a Good Dividend Yield? Yields from 2% to 6% are generally considered to be a good dividend yield, but there are plenty of factors to consider when deciding if a stock's yield makes it a good investment.
There is no hard and fast rule for how many dividend stocks to start a portfolio, but a good starting point is to aim for a minimum of 10. This will give you a good mix of different companies and sectors and help to diversify your risk.
You Can Build a Dividend Portfolio for Regular Income
Hold between 20 and 60 stocks to reduce company-specific risk. Roughly equal-weight each position. Invest no more than 25% of your portfolio in any one sector. Target companies with Safe or Very Safe Dividend Safety Scores™
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