In a market like we’ve seen in recent months, when key benchmarks showed negative year-to-date returns, dividend income becomes even more important to many investors. That additional income can either be reinvested in stocks or an exchange-traded fund, at a lower price if the investment is low, or kept as a source of income. Both options are good, depending on the investor. Many investors, especially those who are retired, would like to have that extra dividend income.
Two of the best ETFs on the market today for dividend income are the SPDR portfolio S&P 500 High Dividend ETF (NYSEMKT: SPYD) and the Invesco S&P Ultra Dividend Earnings ETF (NYSEMKT: RDIV)†
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SPDR Portfolio S&P 500 High Dividend ETF
The SPDR Portfolio S&P 500 High Dividend ETF generates one of the highest returns on the market along with a high annual payout. This great dividend-producing ETF tracks the S&P 500 High Dividend Index, which is made up of the 80 stocks in the index with the highest dividend yields based on the latest dividends. It is also weighted equally, with all companies being roughly the same size.
The three largest holding companies are currently: Organon† AbbVieand Valero Energy† Financial Services (17%), Utilities (17%), Real Estate (13%) and Energy (13%) are the most represented sectors.
The ETF, which currently trades at $43 a share, has a dividend yield of 4.05%, which is much higher than most other dividend ETFs and higher than the median dividend of 1.38% on the S&P 500. last year the dividend paid a total of $1.56 per share. If you owned 100 shares of this ETF, you would have $156 in income.
There are a few other advantages with this ETF, especially in these times. Because it focuses on dividends, it includes many stable, long-established companies, many in sectors that thrive in an environment of rising interest rates. It also includes many value stocks, which have outperformed growth in the past year. And because it’s equally weighted, returns will be less volatile than a typical S&P 500 market-weighted ETF.
As a result, this ETF has grown by 2% since its inception in 2015. Over the past year through January 31, it is up 32% and has a 10.3% annualized return since its inception in 2015. With an expense ratio of 0.07%, it is one of the cheapest ETFs on the market .
Invesco S&P Ultra Dividend Earnings ETF
The Invesco S&P Ultra Dividend Revenue ETF takes a unique approach to generating dividend income for investors. It starts with the S&P 900 — which includes the S&P 500 large-cap index and the S&P 400 mid-cap index. From each, it excludes stocks that do not pay dividends, as well as stocks that do not have positive sales growth over the previous 12 months. From that pool, the fund includes the top 60 stocks with the highest dividend yields, and it is weighted by the stocks with the highest yields over the last four quarters.
It should come as no surprise that the index is heavily weighted with value stocks right now. The large cap value represents 33.7%, the mid cap value 43% and the small cap value 17.4% of the portfolio. The largest holdings are Marathon Petroleum† Cardinal Healthand Southern Company†
This ETF trades at approximately $42 per share and returns a 3.43% return. Last year it paid out $1.39 per share on an annual basis, which equates to $139 per year in dividend income for those who own 100 shares.
Due to its construction and earnings weighting, it is built to perform well across different market cycles. This year it’s pretty much flat from February 25, and last year it’s up 29.7% on January 31. Since its inception in 2013, it has achieved an annual return of 11.5%. The expense ratio is slightly higher than the other ETF listed here at 0.39%.
The nice thing about both ETFs, aside from the fact that they are built to generate high dividend income, is that they are solid diversifications in a portfolio and produce positive returns when other investments fall.
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