4 Income-Paying ETFs to Consider - InvestingChannel

4 Income-Paying ETFs to Consider

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In yesterday’s Juice, we started our series on ETF investing, using tech stocks and tech-heavy ETFs for illustration. Today, we look to the ETF world for insight into constructing a dividend stock portfolio. 

First, some basics. 

A dividend is a payout companies make to investors once a period quarterly, monthly, annually, or as a one-off special dividend from their profits. We’ll discuss monthly dividend companies later this month. 

Just because a company pays a dividend doesn’t mean it’s a strong investment. You still have to research the company itself, apart from the dividend. From there, you must look at the quality and sustainability of the dividend. We’ll tackle that relatively complex element of dividend stock investing later this month. 

When we get there, we’ll talk a lot about dividend yield and payout ratio – two key metrics to consider when assessing dividend stocks. 

Different Types of Dividend Stocks

The Juice likes to classify dividend stocks by how consistently they increase their dividends. A reliable dividend matters partly because the cornerstone of dividend growth investing is compounding. As you collect dividend payments, you reinvest them into new shares of stock. Over time, this can produce exponential (compounding) growth. We’ll also dig deep into compounding later this month. 

Here are our classifications:

  • Dividend Achievers: Have increased their dividend payments for at least 10 consecutive years. E.g., Microsoft (MSFT) has a 20-year streak. 
  • Dividend Contenders: Have increased their dividend payments for between 10 and 24 consecutive years. So Microsoft is a contender as well.
  • Dividend Aristocrats: Have increased their dividend payments for at least 25 consecutive years. At the moment, there are 68 dividend aristocrats, including Realty Income (O), NextEra Energy (NEE), and Church & Dwight (CHD). Industrial conglomerate Dover (DOV) is at a chart-topping 67 years. 
  • Dividend Kings: Some companies are both aristocrats and kings, as long as they’ve increased their dividend payments every year for at least 50 consecutive years. Including DOV, there are 48 dividend kings. Others include Coca-Cola (KO), Johnson & Johnson (JNJ), and PepsiCo (PEP)

Looking at all these individual stocks and deciding which ones and how much to buy can be confusing. This is where ETFs come to the rescue…

ETF Investing

4 Income-Paying ETFs to Consider

Key Takeaways:

  • Because picking individual stocks can be overwhelming, consider turning to the smaller, but still sizable, world of ETFs. 
  • There’s an ETF product for every type of dividend investor. 
  • It doesn’t take much to spread your exposure across a wide array of dividend stocks using ETFs. 

The number of dividend ETFs to choose from can feel overwhelming. But it’s not as overwhelming as the single-stock path. Plus, there’s some methodology for comparing dividend ETFs. 

While we like to stick to tradition and label as aristocrats only companies with dividend increase streaks of 25 years or more the times are a-changin’. 

ProShares, one of the big players in dividend ETFs, offers three types of funds that own only what they call dividend growers:

  • The ProShares S&P 500 Dividend Aristocrats ETF (NOBL), which owns all of the aforementioned aristocrats
  • The ProShares S&P MidCap 400 Dividend Aristocrats ETF (REGL), which tracks the performance of the index with the same name and owns only stocks that have increased their dividend payments for a minimum of 15 straight years 
  • The ProShares Russell 2000 Dividend Growers ETF (SMDV), which tracks the performance of the Russell 2000 Dividend Growth Index and holds only companies that have grown their dividend payments for at least 10 years in a row

ProShares also offers the tech-focused S&P Technology Dividend Aristocrats ETF (TDV) we told you about yesterday, which invests in select tech stocks that have increased their dividend payments for at least seven consecutive years.  


Source: Google Finance

Investing in these four funds, which as you can see above performed relatively well in a rough 2022, provides a nice level of diversification among dividend stocks. 

Consider the top three holdings from each fund, as of the end of 2022: 

  • NOBL: Air Products and Chemicals (APD), Caterpillar (CAT), Procter & Gamble (PG)
  • REGL: RenaissanceRe Holdings (RNR), MSA Safety (MSA), SEI Investments Company (SEIC)
  • SMDV: SJW Group (SJW), Avista (AVA), South Jersey Industries (SJI)
  • TDV: KLA (KLAC), Broadcom (AVGO), Mastercard (MA) 

While top holdings can change daily, this snapshot shows that investing in just a handful of dividend ETFs can provide diversified exposure to lots of sizes and sectors of dividend stocks. There are companies large, medium, and small in industries ranging from tech and finance to insurance, consumer staples, and energy. 

You’ll also have exposure to names you probably want and expect, such as Apple (AAPL) and Microsoft in TDV and all the textbook dividend aristocrats and kings in NOBL.

The Bottom Line: Consider this a primer on dividend growth investing using ETFs. Today’s exercise illustrates one way to achieve a nice level of diversification. 

But it doesn’t stop there. You can expand the breadth of your dividend stock investing with myriad other ETF choices. We’ll dive into this along with the key dividend growth investing terms you need to know later this month. We’ll also do likewise beyond the tech and dividend-focused universes.

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