Ready to ramp up your income in 2023? The right dividend exchange-traded funds (ETFs) can make it happen.
This may be a tricky year for investors. The stock market could recover and break out into a gangbusters rally, or high interest rates and lingering inflation could once again conspire to push stock prices lower. With this kind of uncertainty, the best strategy is to prepare for the worst and hope for the best. As billionaire investor Warren Buffett says, the most important rule of investing is: "Never lose money."
Let's take a closer look at dividend ETFs that can get you through an uncertain investing year ahead. You'll also learn how to choose dividend ETFs, how ETFs compare to stocks and the different types of dividend ETFs available.
Ready to dive in? The table below introduces nine dividend ETF picks for 2023.
With inflation at a 40-year high running at more than 6.5%, dividend stocks offer one of the best ways to beat inflation and generate a dependable income stream. Download “Five Dividend Stocks To Beat Inflation,” a special report from Forbes’ dividend expert, John Dobosz.
Schwab U.S. Dividend Equity ETF
SCHD
Top holdings include Broadcom
Global X S&P 500 Quality Dividend ETF
QDIV
The fund's expense ratio is reasonable at 0.20%.
SPDR S&P Global Dividend ETF (WDIV WDIV )
WDIV seeks to track the performance of the S&P 500 Global Dividend Aristocrats Index. The index includes high-yielding stocks from around the world that have not cut dividends in the last 10 consecutive years. Index constituents (and fund holdings) must also meet requirements for size, liquidity, and payout ratio.
WDIV's expense ratio is 0.40%. This is higher than the other index funds on our list, but that's typical for a fund with international exposure.
Consumer Staples Select Sector SPDR Fund (XLP XLP )
XLP invests in S&P 500 companies that operate in the consumer staples sector. These are primarily beverage companies, household and personal care products manufacturers, food companies, food retailers and tobacco companies.
You'll recognize most of the stocks in this fund's portfolio. Procter & Gamble
Utilities Select Sector SPDR Fund (XLU XLU )
XLU, in the same fund family as XLP, invests in S&P 500 companies in the utilities sector. The fund has the highest exposure to electric utilities and companies that deliver power in multiple forms. There are also smaller exposures to water utilities, renewable electricity producers and gas utilities.
As with other sector funds in this family, XLU has a modest expense ratio of 0.10%.
Vanguard Health Care ETF (VHT VHT )
VHT invests in large-cap, mid-cap and small-cap U.S. health care stocks. This includes biotech firms, health care distributors, makers of health care equipment, facility operators, service providers and pharmaceutical companies. Top holdings include UnitedHealth Group
Vanguard is known for its low-cost index funds. The underlying index here is MSCI
With inflation at a 40-year high running at more than 6.5%, dividend stocks offer one of the best ways to beat inflation and generate a dependable income stream. Download “Five Dividend Stocks To Beat Inflation,” a special report from Forbes’ dividend expert, John Dobosz.
iShares Global REIT ETF (REET REET )
REET invests in different types of REITs ( real estate income trusts) around the world. REITs produce high dividends plus capital appreciation. They can be volatile, however.
This fund addresses the potential volatility through diversification. Holdings include REITs from developed to emerging markets and across a range of specialties, including retail, office, healthcare and residential real estate. The fund operates with an efficient expense ratio of 0.14%.
Global X SuperIncome Preferred ETF (SPFF PFF SPFF )
SPFF invests in the 50 highest-yielding preferred securities in the U.S. and Canada.
Preferreds are hybrid assets that share characteristics of stocks and bonds. They pay tax-efficient qualified dividends. But, those dividends may be structured like debt–say, with a fixed or floating rate. The company can choose to skip its preferred dividend if cash is tight.
SPFF pays dividends monthly and has an impressive yield. Preferred stock doesn't appreciate the way common stock does, so the dividends will carry the total return. The fund's expense ratio is 0.58%.
Risk Parity ETF (RPAR RPAR )
RPAR invests across different asset classes to limit downside risk in weak markets, while still allowing for gains in stronger markets. The fund takes a risk parity approach—a complex allocation strategy that strategically weights asset class exposures to manage overall risk and return. The fund does use leverage in its strategy. RPAR has a gross expense ratio of 0.53%.
Methodology For Choosing These ETFs
As noted, general uncertainty about the financial markets and the U.S. economy warrants a defensive approach in the year ahead. The dividend ETFs on our list follow that mindset. Cumulatively, they provide exposure to high-quality stocks, defensive sectors, and alternative assets that don't correlate directly with U.S. equities.
High-Quality ETFs
The first three picks—SCHD, QDIV and WDIV—are quality-focused funds. They largely hold established companies with strong balance sheets and sustainable dividends.
Sector ETFs
XLP, XLU and VHT provide exposure to consumer staples, utilities and healthcare. These sectors often hold up well in weak economies because they're among the last things consumers cut from their household budgets. And this makes sense. It's tough to go without toothpaste, electricity, and access to our essential medications.
Alternative Assets
Alternative assets can be volatile, so they don't fit the typical mold of a defensive investment. What they can deliver, though, is performance that doesn't move in lockstep with the U.S. equity market. That's attractive, albeit in small doses, if you expect U.S. stocks to struggle in the coming year.
Note that these nine dividend ETFs are not intended to be a complete portfolio for 2023. They provide three different approaches to an uncertain year ahead. You can mix and match those approaches to suit your risk tolerance and investing goals.
How To Choose The Best Dividend ETFs
There are many more high dividend yield ETFs available that may have a role to play in your portfolio. As you research your options, it's smart to compare them on a few key characteristics:
- Expense ratio: Expense ratio tells you what you are charged annually for the fund's administrative costs. A lower expense ratio means more of the underlying investment returns flow through to your bottom line.
- Dividend yield: Use the yield to estimate the income an ETF will generate. Also evaluate the yield relative to the fund's risk level. More risk should produce higher, but potentially less reliable yields.
- Dividend track record: How much does the dividend payout fluctuate from quarter to quarter or month to month? Can you manage the income volatility?
- Total return: A fund's total return includes dividend income plus appreciation. A high dividend yield is best analyzed in the context of total return.
- Trading volume: Trading volume is an indicator of market sentiment. Heavily traded ETFs are in demand, which may make them easier to sell.
ETFs Vs. Stocks
Many investors prefer ETFs over individual stocks because they are easier to manage. With ETFs, you can create a diverse portfolio with only a handful of positions. If you invested in dividend-paying stocks, you'd probably want 20 or more individual holdings.
Still, there are reasons why you might prefer stocks over ETFs. These include:
- More control: You can pick and choose exactly what you want with stocks. You can also increase or decrease a position anytime, without affecting the rest of your portfolio.
- Greater potential: It is possible to beat the market with a handpicked collection of stocks. It's not possible to beat the market if you are investing in broad-based index funds—like a total market fund or an S&P 500 fund.
- No fees: ETFs have administrative fees, while stocks do not. Those fees dilute your investment returns.
You can manage around those ETFs drawbacks to some extent. For example, you might lean into smaller, more specialized funds over broad-based index funds—for greater control and return potential. You'd also choose low-fee funds whenever possible.
Types Of Dividend ETFs
Fortunately, there are many dividend ETFs out there, which means you can customize an ETF portfolio in countless ways. Your fund options fall into five main categories:
- Dividend appreciation ETFs: These invest in companies that have historically raised their dividends regularly.
- High yield dividend ETFs: High yield dividend ETFs invest in companies with generous dividend payments relative to their peers.
- Quality factor dividend ETFs: These screen their stock holdings for quality. The screening methodology may be defined by the fund, but it often comes from an underlying index.
- REIT ETFs: REIT ETFs invest in real estate investment trusts, which typically pay high yields.
- Sector ETFs: Sector ETFs invest in companies in a specific economic sector, such as energy or healthcare.
ETFs For A Strong 2023
Dividend investing is a practical approach in the face of market uncertainty. If the market struggles and share prices fall, at least your reliable dividend payers will still be returning value.
A bear market is also an ideal time to reinvest your dividends if you can. When the market's down, your investing dollar buys more shares. A bigger share count drives up your income. It also primes your portfolio for stronger gains when the market recovers. Those two outcomes—income and gains—are your building blocks for long-term wealth creation.
Five Top Dividend Stocks to Beat Inflation
Many investors may not realize that since 1930, dividends have provided 40% of the stock markets total returns. And what is even lesser known is its outsized impact is even greater during inflationary years, an impressive 54% of shareholder gains. If you’re looking to add high quality dividend stocks to hedge against inflation, Forbes’ investment team has found 5 companies with strong fundamentals to keep growing when prices are surging. Download the report here.
