Investing in dividend ETFs can be a great way to build a robust portfolio and create a source of passive income on the side.
Dividend stocks pay a portion of their profits back to shareholders in the form of a dividend, and over time, that money can add up substantially. The more shares you own, the more you’ll receive in dividends. By investing consistently for as many years as possible, you can create a steady stream of passive income with this type of investment.
However, not all dividend ETFs are created equal, and it’s important to look at the overall investment rather than the dividend payments alone. These three funds are strong options, and they can be a great addition to any portfolio.
1. Vanguard Dividend Appreciation ETF (VIG)
The Vanguard Dividend Appreciation ETF (NYSEMKT:VIG) includes 247 dividend-paying stocks from multiple industries, and it tracks the NASDAQ US Dividend Achievers Select Index.
With so many stocks from a wide variety of industries, this fund provides plenty of diversification and can help limit your risk. While all investments are subject to short-term volatility, when you’re investing in many different stocks across multiple sectors, your money is more protected against stock market turbulence.
Since its inception in 2006, this ETF has earned an average rate of return of around 10% per year. If you were to invest, say, $400 per month while earning a 10% average annual return, you’d have around $790,000 after 30 years.
This fund also pays quarterly dividends of around $0.50 to $0.60 per share. While that may not sound like much, when you own hundreds or even thousands of shares after decades of investing, those dividend payments add up.
2. SPDR S&P Dividend ETF (SDY)
The SPDR S&P 500 Dividend ETF (NYSEMKT:SDY) tracks the S&P High Yield Dividend Aristocrats Index, and it includes stocks from companies that have consistently increased their dividends every year for at least 20 consecutive years.
This fund also has a long track record, as it was established in 2005. It contains 112 stocks from a variety of industries, providing ample diversification.
Similar to the Vanguard Dividend Appreciation ETF, this fund has earned an average rate of return of around 10% per year since it was founded. It also pays a quarterly dividend of roughly $0.50 to $0.60 per share, and because its stocks have a history of increasing their dividends, your payments will likely increase over time.
3. iShares Core Dividend Growth ETF (DGRO)
The iShares Core Dividend Growth ETF (NYSEMKT:DGRO) includes 389 stocks from a wide variety of industries, making it the most diversified fund on the list. It also provides exposure to stocks that have a history of increasing their dividends over time, making it a solid option for those who want to create a source of passive income.
This fund pays quarterly dividends of around $0.20 per share, which is lower than many other ETFs. However, it’s also earned an average rate of return of around 13% per year since its inception in 2014. If you were investing $400 per month while earning a 13% average annual return, you’d have more than $1.4 million after 30 years.
Keep in mind, though, that the stock market has experienced an incredible bull market over the past decade, so these types of returns may not be sustainable. However, because this ETF includes solid stocks that will likely increase their dividends consistently, it’s still a smart option for your portfolio.
Dividend ETFs can help you build a strong portfolio while also creating a source of passive income. With the right investments, you’ll be on your way toward a more financially secure future.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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