During a market like we have experienced over the past few months when the major benchmarks are posting negative year-to-date returns, dividend income becomes even more important for many investors. That extra income can either be reinvested back in stocks or an exchange-traded fund, at a cheaper price if the investment is down, or kept as a source of income. Either option is good, depending on the investor. Many investors, particularly those in retirement, like to have that extra dividend income.
Two of the best ETFs on the market right now for dividend income are the SPDR Portfolio S&P 500 High Dividend ETF (SPYD 0.10%) and the Invesco S&P Ultra Dividend Revenue ETF (RDIV 0.04%).
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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 yields on the market along with a high annual payout. This great dividend-producing ETF tracks the S&P 500 High Dividend Index, which consists of the 80 stocks in the index with the highest dividend yields based on the latest dividends. Also, it is equal-weighted, with all of the holdings roughly the same size.
The three largest holdings currently are Organon, AbbVie, and Valero Energy. Financials (17%), Utilities (17%), Real Estate (13%), and Energy (13%) are the sectors that are most represented.
The ETF, currently trading at $43 per share, has a dividend yield of 4.05%, which is well higher than most other dividend ETFs and higher than the 1.38% median dividend on the S&P 500. Over the past year, it paid out dividends totaling $1.56 per share. If you owned 100 shares of this ETF, you would have $156 in income.
There are a few other benefits with this ETF, particularly in these times. Because it is focused on dividends, it includes a lot of stable, long established companies, many of which are in sectors that do well in rising interest rate environments. It also includes a lot of value stocks, which have been outperforming growth over the past year. And because it is equal-weighted, its returns will be less volatile than a typical S&P 500 market-weighted ETF.
As a result, this ETF is up 2% year to date as of Feb. 25. Over the past year through Jan.31, it is up 32%, and it has a 10.3% annualized return since inception in 2015. Finally, with an expense ratio of 0.07%, it is one of the cheapest ETFs on the market.
Invesco S&P Ultra Dividend Revenue 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 donʻt pay dividends as well as those that don't have positive revenue gains over the prior 12 months. From that pool, the fund includes the top 60 stocks with the highest dividend yields, and it is weighted by those with the highest revenue over the trailing four quarters.
It should come as no surprise that the index is heavily weighted with value stocks right now. Large-cap value represents 33.7%, mid-cap value represents 43%, and small-cap value accounts for 17.4% of the portfolio. The largest holdings are Marathon Petroleum, Cardinal Health, and Southern Company.
This ETF trades at about $42 per share and pays out a yield of 3.43%. Last year it paid out $1.39 per share on an annual basis, which comes to $139 per year in dividend income for those who own 100 shares.
Because of its construction and revenue-weighting, it is built to perform well in various market cycles. This year it is basically flat as of Feb. 25, and over the past year it is up 29.7% as of Jan. 31. Since inception in 2013, it has posted an annualized return of 11.5%. Its expense ratio is a bit higher than the other ETF noted here at 0.39%.
The nice thing about both of these ETFs, aside from the fact that they are built to generate high dividend income, is that they are solid diversifiers in a portfolio, providing positive returns when other investments are down.
Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
