If you're approaching or entering retirement -- and, really, even if you're far from retirement -- consider including a big bunch of dividend-paying stocks in your portfolio. You can expect healthy and growing companies that pay dividends to increase in value over time and to generate cash for you regularly. Their dividend payouts will tend to increase over time, too.
Retirees can use that cash to help support themselves, and pre-retirees might just reinvest those dividends into more shares of stock. (Some good brokerages offer to reinvest your dividends for you automatically.)
Image source: Getty Images.
Why dividends?
Don't underestimate the power of dividends. After all, the fact that a company has committed to paying a dividend means that it has grown to a point where management is confident that earnings will support such a payout. Dividend payers tend to outperform non-payers, too.
Check out the numbers for S&P 500 companies below, from a Hartford Funds report:
Dividend-Paying Status
Average Annual Total Return, 1973-2023
Dividend growers and initiators
10.19%
Dividend payers
9.17%
No change in dividend policy
6.74%
Dividend non-payers
4.27%
Dividend shrinkers and eliminators
(0.63%)
Equal-weighted S&P 500 index
7.72%
Data source: Ned Davis Research and Hartford Funds.
How to invest in dividend payers easily
One of the best -- and easiest -- ways to invest in dividend-paying stocks is to do so via exchange-traded funds (ETFs). An ETF is a fund -- which often tracks a particular index -- that trades like a stock.
Below are seven dividend-focused ETFs to consider, plus a simple S&P 500 index fund for comparison purposes -- and also because it's a darn fine ETF for anyone to consider.
ETF
Recent Yield
5-Year Avg. Annual Return
10-Year Avg. Annual Return
iShares Preferred & Income Securities ETF(NASDAQ: PFF)
6%
3.29%
4.11%
Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD)
3.6%
13.6%
12.4%
iShares US Real Estate ETF(NYSEMKT: IYR)
2.7%
4.2%
6.8%
Vanguard High Dividend Yield ETF(NYSEMKT: VYM)
2.7%
11.8%
10.9%
SPDR S&P Dividend ETF(NYSEMKT: SDY)
2.3%
10%
10.8%
iShares Core Dividend Growth ETF (NYSEMKT: DGRO)
2.2%
12.8%
12.9%
Vanguard Dividend Appreciation ETF (NYSEMKT: VIG)
1.7%
13.3%
12.7%
Vanguard S&P 500 ETF(NYSEMKT: VOO)
1.2%
16.4%
14.1%
Data source: Morningstar.com, as of Oct. 15, 2024.
Each ETF, in a nutshell
You'll notice that some of the funds sport hefty dividend yields, while others feature some terrific long-term growth rates over the past five and 10 years. In investing, there's generally a trade-off between growth and income. Here's a little more about each of these index funds and the index that each tracks:
iShares Preferred & Income Securities ETF: This tracks the ICE Exchange-Listed Preferred & Hybrid Securities Index, which includes a group of U.S. dollar-denominated preferred securities, hybrid securities, and convertible preferred securities. Note that preferred stocks tend to not increase in value much and their dividends aren't usually big growers, either -- but they do tend to feature generous payouts.
Schwab U.S. Dividend Equity ETF: This ETF tracks the Dow Jones U.S. Dividend 100 Index of high-dividend-yielding U.S. stocks that have consistently paid dividends. The ETF's biggest holdings recently were Home Depot, BlackRock, and Cisco Systems.
iShares US Real Estate ETF: This ETF tracks the Dow Jones U.S. Real Estate Capped Index and encompasses many real estate investment trusts (REITs) -- companies that own many properties and earn income by renting them out. This ETF's top holdings recently included Prologis, American Tower, and Equinix. Respectively, they specialize in warehouses, telecommunications towers, and digital infrastructure, among other things.
Vanguard High Dividend Yield ETF: This ETF tracks the FTSE High Dividend Yield Index and focuses on domestic stocks with high dividend yields (excluding REITs). Its recent top holdings included Broadcom, JPMorgan Chase, and ExxonMobil.
SPDR S&P Dividend ETF: This ETF tracks the S&P High Yield Dividend Aristocrats Index, which encompasses companies that have paid dividends for at least 20 years and that meet certain criteria tied to liquidity and size. (The term Dividend Aristocrats? is a registered trademark of Standard & Poor’s Financial Services LLC.) Its top holdings recently included Realty Income, Kenvue, and IBM.
iShares Core Dividend Growth ETF: This ETF tracks an index of U.S. stocks with a history of consistently growing dividends. Its top holdings recently were ExxonMobil, Apple, and Microsoft.
Vanguard Dividend Appreciation ETF: This ETF tracks the S&P US Dividend Growers Index, which features companies that have increased their payouts for at least 10 consecutive years. The top holdings recently were Microsoft, Apple, and Broadcom.
Vanguard S&P 500 ETF: This ETF, which tracks the S&P 500, is here for comparison purposes. It, too, features a dividend yield, but it also includes plenty of non-dividend payers. While the dividend yield isn't very big, the fund makes up for that with a solid track record of growth. (Note that despite the returns in the table above, the long-term average annual gain of the stock market is closer to 10% than 16%.)
So consider any or all of these ETFs for your long-term portfolio, whether you're in or approaching retirement or have decades to go before retiring.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Selena Maranjian has positions in American Tower, Apple, Broadcom, Microsoft, Realty Income, and Schwab U.S. Dividend Equity ETF. The Motley Fool has positions in and recommends American Tower, Apple, Cisco Systems, Equinix, Home Depot, JPMorgan Chase, Kenvue, Microsoft, Prologis, Realty Income, Vanguard Dividend Appreciation ETF, Vanguard S&P 500 ETF, and Vanguard Whitehall Funds-Vanguard High Dividend Yield ETF. The Motley Fool recommends Broadcom and International Business Machines and recommends the following options: long January 2026 $13 calls on Kenvue, long January 2026 $180 calls on American Tower, long January 2026 $395 calls on Microsoft, long January 2026 $90 calls on Prologis, short January 2026 $185 calls on American Tower, and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
