Morningstar says these dividend ETFs are among the best.
Exchange-traded funds are one of the easiest ways to diversify your retirement portfolio. ETFs are a great source of passive, diversified exposure to a particular market index, sector or theme. Dividend ETFs can also be a great way to earn low-risk income, especially with interest rates near all-time lows. With thousands of ETFs to choose from, investors should seek out funds that have low fees, plenty of liquidity and a reasonable valuation. Here are eight ETFs with at least a 2% distribution yield, at least 500,000 in daily average trading volume and a five-star rating from Morningstar analysts.
Energy Select Sector SPDR Fund (ticker: XLE)
After years of underperformance, the energy sector has come to life so far in 2021 on hopes of booming global economic reopening demand and rising commodity prices. The XLE fund is already up 38% year to date in 2021, more than triple the return of the overall S&P 500. The XLE is one of State Street Global Advisors’ most popular S&P 500 sector ETFs, providing exposure to some of the world’s largest energy companies, including many oil and gas stocks. The XLE’s top holdings include Exxon Mobil Corp. (XOM), Chevron Corp. (CVX) and EOG Resources (EOG). The fund also pays a 4.5% dividend.
Real Estate Select Sector SPDR Fund (XLRE)
The XLRE fund holds stocks that are included in the S&P 500 real estate sector and has high exposure to some of the largest U.S. real estate investment trusts. Top holdings include American Tower Corp. (AMT), Prologis (PLD) and Crown Castle International Corp. (CCI), which together account for about 31.3% of the fund’s assets. The rest of the fund’s $2.84 billion in assets is devoted to 28 other real estate stocks and real estate investment trusts. The fund has outperformed the S&P 500 so far in 2021, and it pays a 3.1% dividend.
Vanguard Short-Term Corporate Bond ETF (VCSH)
ETFs aren’t just about stock investing. The VCSH fund is one of the top bond ETFs in the market today, according to Morningstar. The VCSH invests in investment-grade corporate bonds that are on the short end of the maturity spectrum. These short-term corporate bonds come with a moderate amount of credit risk but have limited exposure to rising interest rates. Top VCSH ETF holdings include bonds from high-quality companies like Bank of America Corp. (BAC), Apple (AAPL) and Charter Communications (CHTR). The VCSH ETF has $45 billion in assets under management and pays a 2.15% dividend yield.
Schwab US Dividend Equity ETF (SCHD)
Rather than looking for an ETF that happens to have a decent dividend, investors can also invest in the SCHD fund, which specifically targets dividend stocks. There are many dividend ETFs out there, but the SCHD fund selects stocks specifically based on long-term distributions. That unique approach allows the fund to avoid stocks that have attractive dividend yields only because their share prices have performed so poorly. The $25 billion fund has 101 stocks, including top holdings Home Depot (HD), Pfizer (PFE) and IBM Corp. (IBM), and it pays a 2.95% dividend yield.
Global X NASDAQ 100 Covered Call ETF (QYLD)
The QYLD ETF is another creative fund that takes advantage of a popular income-generating option trading strategy called covered call selling. The fund buys blue-chip stocks that are components of the Nasdaq 100 index and then sells corresponding call options for those stocks to generate an income stream. As long as the calls expire out of the money, QYLD investors get the benefit of any upside in the fund’s stock holdings and also get to pocket the proceeds from the call option sales. The fund’s top holdings include Apple, Microsoft Corp. (MSFT) and Amazon.com (AMZN), and it pays a 12.21% distribution.
VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL)
The ANGL fund holds high-yield bonds of companies with below-investment-grade credit ratings. High-yield corporate bonds are also commonly called “junk” bonds, but the diversification of a junk bond ETF can limit the risks typically associated with these types of investments. Top holdings include bonds from companies like Carnival Corp. (CCL), Kraft Heinz Co. (KHC) and Occidental Petroleum Corp. (OXY). The ANGL ETF’s 300 bond holdings certainly aren’t the highest-quality debt investments. But what it lacks in credit quality, the ETF makes up for with yield. The fund has $4.9 billion in assets and pays a 4.75% distribution.
Vanguard Intermediate-Term Bond Index Fund ETF (BIV)
The BIV fund is similar to Vanguard’s VCSH, but the BIV ETF specifically invests in investment-grade bonds that have maturities of between five and 10 years. In addition to corporate bonds, the BIV fund also holds U.S. Treasury debt and agency securities. The BIV fund holds 2,175 bonds, and the extreme diversification helps minimize investment risk. Top holdings include U.S. Treasury notes expiring between 2026 and 2031, and each of its top six holdings represents less than 2.4% of the fund’s total assets. The BIV fund pays a 2.25% distribution.
iShares Fallen Angels USD Bond ETF (FALN)
The FALN fund is iShares’ version of VanEck’s ANGL ETF. The ETF contains junk bonds that previously held investment-grade ratings. The fund specifically targets a subset of the high-yield bond market that has historically performed better than the high-yield bond market as a whole, according to iShares. Both the FALN fund and the ANGL ETF invest in high-yield bonds, but the FALN fund has 371 total holdings, giving it a slight edge in terms of diversification. It also pays a 5.14% distribution, slightly above the 4.75% yield of the ANGL fund.
Eight dividend ETFs for retirement investors
— Energy Select Sector SPDR Fund (XLE)
— Real Estate Select Sector SPDR Fund (XLRE)
— Vanguard Short-Term Corporate Bond ETF (VCSH)
— Schwab US Dividend Equity ETF (SCHD)
— Global X NASDAQ 100 Covered Call ETF (QYLD)
— VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL)
— Vanguard Intermediate-Term Bond Index Fund ETF (BIV)
— iShares Fallen Angels USD Bond ETF (FALN)