Dividend ETFs: Can You Really Earn Dividends with ETFs?

Dividend ETFs: Can You Really Earn Dividends with ETFs?

Dividend ETFs offer investors a convenient way to access a diversified portfolio of dividend-paying stocks, providing both regular income and the potential for long-term capital appreciation.

Building a diversified portfolio of dividend-paying stocks can be daunting, especially for those who don’t want to manage a large number of individual stocks. For those seeking a stable income stream without the complexities of managing numerous individual stocks, dividend ETFs present an attractive solution.

In this post, we will explore what dividend ETF is, its benefits and drawbacks, and highlight five high-dividend ETFs to consider in 2024.

What is a Dividend ETF?

A dividend ETF (Exchange-Traded Fund) is a type of fund that invests in a diversified portfolio of dividend-paying stocks. These funds are typically passively managed, meaning they aim to replicate the performance of a specific index composed of companies with a history of consistent dividend payments. By doing so, dividend ETFs offer investors a way to benefit from regular income distributions without the need to handpick individual dividend stocks.

Dividend ETFs often include blue-chip companies—large, well-established firms with a track record of financial stability and reliable dividend payouts. This makes them particularly attractive to risk-averse investors seeking steady income with lower risk. It’s important for investors to examine the history of the underlying stocks within the ETF to ensure consistency in dividend payments.

Benefits of Investing in Dividend ETFs

  1. Stable Income Stream: One of the primary benefits of dividend ETF is the reliable income stream it provide. Investors receive regular dividend payments from the underlying stocks, which can be a significant source of passive income.
  2. Diversification: Dividend ETFs typically invest in a broad range of dividend-paying stocks, spreading risk across different sectors and companies. This diversification helps mitigate the impact of poor performance from any single stock or sector.
  3. Blue-Chip Exposure: Many dividend ETFs focus on blue-chip stocks, which are shares in large, well-established companies with a history of financial stability. These companies are often less risky and provide a dependable source of dividends.
  4. Cost Efficiency: As passive investment vehicles, dividend ETFs generally have lower expense ratios compared to actively managed funds. This cost efficiency can enhance overall returns, especially over the long term.

Drawbacks of Investing in Dividend ETFs

  1. Market Risk: Like all investments in the stock market, dividend ETFs are susceptible to market fluctuations. If the stock market experiences a downturn, the value of the underlying stocks in the ETF may decrease, negatively impacting the fund’s performance.
  2. Lack of Control: Investors in dividend ETFs cannot select the individual securities within the fund. This lack of control may be a disadvantage for those who prefer a more hands-on approach to investing.
  3. Average Income: The dividend yield on these funds is an average of all the underlying stocks. If any of the stocks within the fund reduce their dividends, the overall yield of the ETF will also decrease.

5 High Dividend ETFs to Buy in 2024

1. Global X Alternative Income ETF (ALTY)

ALTY is designed to mirror the Indxx SuperDividend Alternatives Index, investing in a range of alternative securities such as master limited partnerships, business development companies (BDCs), preferred stock, emerging market bonds, and call options. The primary objective is to provide high, sustained dividend income, with a trailing yield of 7.3%. ALTY distributes dividends monthly and has not missed a dividend in over eight years, making it suitable for aggressive investors seeking superior income from a diversified pool of alternative investments.

2. Virtus Private Credit ETF (VPC)

VPC aims to offer a dependable, high-dividend yield by investing in BDCs and closed-end funds focusing on the private credit market. The ETF mirrors the Indxx Private Credit Index, with 58 holdings in the portfolio and a yield of 11%. VPC is attractive for income and diversification, making it a compelling choice for investors looking to tap into the fast-growing private credit market.

3. Invesco High Yield Equity Dividend Achievers ETF (PEY)

PEY tracks the Nasdaq Dividend Achievers 50 Index, which includes the top 50 highest-yielding stocks among those that have raised their dividend every year for at least ten consecutive years. With a yield of 5% and assets totaling $1.2 billion, PEY offers a simple and convenient way to invest in the dividend growth strategy, providing both high dividend income and potential for capital appreciation.

4. iShares 20+ Year Treasury Bond Buywrite Strategy ETF (TLTW)

TLTW employs a covered call strategy by holding shares of the iShares 20+ Treasury Bond ETF (TLT) and selling one-month covered calls against that fund. This innovative approach generates income through dividends from TLT and options premiums, with a current yield of 17.5%. TLTW benefits from high interest rate volatility, making it an attractive choice for income generation in a volatile rate environment.

5. VanEck Preferred Securities ex Financials ETF (PFXF)

PFXF invests in preferred stocks issued by non-financial companies, providing high-yielding securities that exhibit characteristics similar to fixed-income investments. The fund includes fixed-rate and adjustable-rate preferred stocks as well as convertible preferred stocks. With a yield of 7.6% and assets of $1.7 billion, PFXF offers a diversified income stream from well-known companies like Ford Motor Co. (F), NextEra Energy Inc. (NEE), and AT&T Inc. (T).

Also read: Top 5 Growth ETFs To Invest In 2024

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