Researching hundreds or thousands of stocks to find the three that a long-term investor wants to stick with for an extended period of time takes a tremendous amount of effort and time. That’s what’s really created the entire industry around exchange traded funds (ETFs), which cater to investors looking for low-cost diversification that can be added to over time without the fear of one specific holding going bust.
In this article, I’m going to highlight why these three ETFs are the stocks I’d consider as the best way to build an ultra-low-cost dividend portfolio. Of course, it’s also possible for investors to go and buy such stocks in their corresponding weights to their own individual portfolios. But with expense ratios below 0.1%, it’s hard to beat the automatic rebalancing and turnover these funds provide, which makes them my preferred way to gain dividend exposure right now.
So, without further ado, let’s dive in!
Vanguard Dividend Appreciation ETF (VIG)
A hand from a smartphone transfers money and dollars fly out
In the world of dividend ETFs, Vanguard Dividend Appreciation ETF (VIG) is one of my top picks. That’s not only due to this fund’s 1.7% yield (about 50% higher than the current yield on the S&P 500). It’s also due to the fact that this ETF is among the lowest-cost dividend ETFs out there, with a current expense ratio of just 0.05%.
But aside from this ETF’s underlying fundamentals which remain strong, there’s also a case to be made that long-term investors looking for dividend growth have one of the best ETF options in this space to consider in VIG.
What this ETF does is it looks at only companies that have raised their dividend distributions for a decade or longer. What that means is that investors can lock in this yield today, and likely earn much higher yields over time. Additionally, as the ETF’s portfolio companies continue to raise their distributions over time (and companies with a longer track record of raising their dividends tend not to stop), their underlying stock prices should also rise leading to solid capital appreciation upside over time.
With a modest valuation multiple and solid exposure to a range of industries (most notably, tech, industrials and healthcare stocks), this is an ETF I think investors looking for long-term compounding ought to consider.
Schwab U.S. Dividend Equity ETF (SCHD)
Dividend visual
With a dividend yield of 3.9% and an expense ratio of just 0.06%, the Schwab U.S. Dividend Equity ETF (SCHD) is one of the top dividend ETFs I continue to tout as an excellent long-term holding. This is one particular stock I’m invested in, and I continue to add to over time for a number of reasons.
First, this is among the most well-balanced dividend ETFs I’ve come across, with less meaningful over-exposure to one particular sector over another. That’s shockingly hard to find, given that many of the top-yielding stocks in the market tend to be in specific sectors. And given this ETF’s yield, which competes with long bond rates, that is indeed something worth touting.
Secondly, the core holdings within SCHD are among the 100 largest U.S. stocks, which have been screened for key quality metrics such as cash flow, return on equity, and dividend consistency. Thus, much of the homework is taken off of investors’ plates, all with a very low expense ratio to boot.
For those looking to build a quality portfolio of dividend stocks, SCHD is where I’d start.
iShares Core High Dividend ETF (HDV)
High yield visual
With a 0.08% expense ratio and a dividend yield of 3.5%, the iShares Core High Dividend ETF (HDV) is another excellent option for long-term investors looking to build their dividend portfolio right now. I’d say that HDV is a fund that’s probably best-suited for older investors looking for higher current yield, as this fund invests in companies that currently display high yields (but also have plenty of underlying balance sheet strength).
As opposed to other dividend growth funds that focus on companies that can grow their dividends over time, the increases this ETF may see over time on the distribution front could be limited. That said, this is an ETF that does hold a number of high-quality companies, many of which I’d like to own individually (but choose to own the basket). With outsized exposure to energy, healthcare and consumer staples stocks, this is a consideration for individual investors as to whether HDV meets their investing needs.
Personally, I think this ETF’s relative stability and its decent up-front yield make its expense ratio more than worth it. For long-term investors, a portfolio consisting of these three ETFs should provide a very meaningful and reliable passive income stream for whatever long-term goals one may have.
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