DIV 201Lesson 2 of 80 of 8
What Are Dividend ETFs?
Funds that hold a basket of dividend payers and pass the income through to you.
What you’ll learn
- What makes an ETF a dividend ETF, and how these funds pick their stocks
- Why many investors prefer a dividend ETF to a handful of dividend stocks
- The difference between a dividend ETF and an option income ETF
- What a dividend ETF can't protect you from
Picking individual dividend stocks takes time, research and a stomach for the occasional cut. A dividend ETF does the selecting for you. It holds a whole basket of dividend paying companies, collects all their payments, and passes them on to you in one tidy distribution. For a lot of people, that’s all the dividend investing they’ll ever need.
What makes it a dividend ETF
A dividend ETF is an ETF whose holdings are chosen because of their dividends. Most track an index with written rules, which typically decide three things:
- Who’s eligible: for example, companies that have paid dividends for ten years, or raised them for 25.
- Who makes the cut: often the highest yielders that pass some quality tests, such as cash flow, debt or return on equity.
- How much of each to hold: by company size, by yield, or equally.
Those rules are why two dividend ETFs can look completely different. One built around high yield will be full of utilities, energy and tobacco. One built around dividend growth will hold more technology, healthcare and industrials, with a lower yield. The next lesson, High Yield vs Dividend Growth ETFs, sorts them into families.
Why people use them
- Diversification. If one company in a hundred cuts its dividend, your income barely notices. If one of five stocks you picked cuts, you feel it.
- Simplicity. One purchase, one line on your statement, one distribution.
- Discipline. The index removes companies that fail its tests, without the emotional attachment you might feel to a stock you chose yourself.
- Low cost. The best known dividend ETFs charge well under 0.1% a year.
Some well known dividend ETFs
| Ticker | Name | Yield | Pays | 1Y total return | 5Y total return |
|---|---|---|---|---|---|
| SCHD | Schwab U.S. Dividend Equity ETF | 3.26% | Quarterly | +23.5% | +55.6% |
| VYM | Vanguard High Dividend Yield Index Fund ETF Shares | 2.26% | Quarterly | +13.7% | +72.6% |
| VIG | Vanguard Dividend Appreciation Index Fund ETF Shares | 1.58% | Quarterly | +10.2% | +66.7% |
| DGRO | iShares Core Dividend Growth ETF | 2.02% | Quarterly | +13.2% | +67.5% |
| HDV | iShares Core High Dividend ETF | 0.80% | Quarterly | +18.8% | +75.2% |
| SPYD | State Street SPDR Portfolio S&P 500 High Dividend ETF | 4.56% | Quarterly | +7.3% | +41.9% |
| NOBL | ProShares S&P 500 Dividend Aristocrats ETF | 2.07% | Quarterly | +7.4% | +35.6% |
| DVY | iShares Select Dividend ETF | 3.47% | Quarterly | +10.8% | +56.4% |
| VYMI | Vanguard International High Dividend Yield Index Fund ETF Shares | 3.23% | Quarterly | +23.1% | +89.8% |
| SCHY | Schwab International Dividend Equity ETF | 4.04% | Quarterly | +15.5% | +53.2% |
You can see the spread straight away. Funds focused on dividend growth, like VIG, yield less than funds focused on high yield, like SPYD, but have often grown faster. VYMI and SCHY hold companies outside the US, which tend to pay higher yields. We go through what’s inside each one in A Tour of Popular Dividend ETFs.
Not every high yield fund is a dividend fund
Search for “high dividend ETF” and you’ll find funds yielding 10%, 30% or even 100%. Almost none of those are dividend ETFs in the classic sense. They get most of their income by selling options, not from the dividends of the companies they hold.
| Dividend ETF | Option income ETF | |
|---|---|---|
| Main source of income | Dividends paid by the companies it holds | Premium from selling options |
| Typical yield | 1.5% to 5% | 7% to 100%+ |
| Upside in a rising market | Full | Partly or largely given up |
| Income tends to | Grow over time with the companies' dividends | Rise and fall with market volatility |
| Examples | SCHD, VYM, VIG | JEPI, QYLD, TSLY |
Both have a place, but they’re different tools. Option income funds get a whole course of their own, starting with How Covered Call ETFs Work.
What a dividend ETF won’t do
A dividend ETF protects you from any single company’s problems, but not from the market. In 2008 and 2009, many dividend funds fell 40% or more, and several cut their distributions as banks and other holdings slashed their dividends. A dividend focus also tends to tilt you towards certain sectors, so you can miss out when other parts of the market lead, as many dividend funds did during the big technology rally of the 2020s.
Check your understanding
4 questionsWhat usually decides which stocks a dividend index ETF holds?
One company in a 100 stock dividend ETF cuts its dividend in half. Roughly what happens to the fund's income if each holding provides about the same income?
A fund yields 11% by selling call options on the Nasdaq-100. Is it a dividend ETF in the usual sense?
Which risk does a broad dividend ETF still leave you exposed to?
Related lessons
Put it into practice
This lesson is for education only and isn’t financial, investment or tax advice. Tickers are used as examples of how things work, not as recommendations. Figures marked as live come from Dividend Duel’s market data and change daily. See our disclosure.