Are high dividend ETFs worth it?
High-dividend ETFs invest in stocks with above-average dividends. In addition, some will use creative investment strategies such as covered-call writing to further enhance yield. High-dividend ETFs can be a great choice for income-oriented investors.
| Symbol | Name | Dividend Yield |
|---|---|---|
| KMET | KraneShares Electrification Metals Strategy ETF | 56.34% |
| TSLY | YieldMax TSLA Option Income Strategy ETF | 53.96% |
| TILL | Teucrium Agricultural Strategy No K-1 ETF | 52.95% |
| NVDQ | T-Rex 2X Inverse NVIDIA Daily Target ETF | 48.10% |
Vanguard High Dividend Yield ETF holds a Zacks ETF Rank of 2 (Buy), which is based on expected asset class return, expense ratio, and momentum, among other factors. Because of this, VYM is an outstanding option for investors seeking exposure to the Style Box - Large Cap Value segment of the market.
Yes, there are a lot of advantages. However, there's also a price to pay for those benefits. The most obvious advantage of dividend investing is that it gives investors extra income to use as they wish. This income can boost returns by being reinvested or withdrawn and used immediately.
One downside to investing in stocks for the dividend is an eventual cap on returns. The dividend stock may pay out a sizable rate of return, but even the highest yielding stocks with any sort of stability don't pay out more than ~10% annually in today's low interest rate environment, except in rare circ*mstances.
Can you live off ETF dividends? While it is possible to live off ETF dividends, you'll need to do some careful planning to make it happen. You'll need to balance how much income your investments bring in, and how much you spend.
Monster Dividend
From a pure income perspective, it's hard to beat QYLD's yield of 12%. This double-digit yield is more than twice the rate of inflation, and it dwarfs the average yield of the S&P 500 and the yield of the ten-year treasury. It also beats the yields of many other popular dividend and high-yield ETFs.
Vanguard High Dividend Yield Index ETF (VYM)
VYM has a dividend yield of 2.85% and paid $3.42 per share in the past year. The dividend is paid every three months and the last ex-dividend date was Mar 15, 2024.
A high dividend yield ETF is an exchange-traded fund that focuses on investing in a portfolio of stocks or other income-generating securities with relatively above-average dividend yields. These ETFs aim to provide investors with a steady stream of income, making them popular among income-seeking investors.
They may pay the money directly to the shareholders, or reinvest it in the fund. Not all ETFs earn dividends for their shareholders, and some ETFs are invested primarily in stocks that historically pay high dividends to their shareholders.
What I wish I knew before investing in dividend stocks?
Look for Growth Potential
While newer companies can pay out some impressive dividends, investors shouldn't be jumping on the bandwagon without doing their research. Aside from looking at past and present returns, it's also important to look at the company's future potential to increase its dividend payouts.
Investing as little as $20 per month into dividend stocks could grow into $1 million in about 65 years. Invest more money or in higher-returning dividend stocks, and you could become a millionaire even faster. You could then live off the income your dividend stocks pay each year.
Investing in dividend-paying stocks carries the potential to earn a yield higher than CDs, but there's a real risk you could lose your principal, too.
A company's high dividend might be because its stock has suffered a significant drop in share price, suggesting financial trouble that could imperil its ability to make future dividend payments.
Dividend Stocks are Always Safe
(In fact, many companies have been known to do this.) Therefore, to avoid dividend traps, it's always important to at least consider how management is using the dividend in its corporate strategy.
Historically, the stock market has an average annual rate of return between 10–12%. So if your $1 million is invested in good growth stock mutual funds, that means you could potentially live off of $100,000 to $120,000 each year without ever touching your one-million-dollar goose.
For example, say I need to earn $50,000 a year to live comfortably and my average dividend yield is 5%. So, I would need to own $50,000 / 0.05 = $1 million worth of shares to meet my income needs.
Dividends and interest payments from ETFs are taxed similarly to income from the underlying stocks or bonds inside them. For U.S. taxpayers, this income needs to be reported on form 1099-DIV. 2 If you earn a profit by selling an ETF, they are taxed like the underlying stocks or bonds as well.
However, it's important to balance diversification and complexity. Holding too many ETFs can limit gains and make it harder to manage, while holding too few can increase risk. Aim for around 10 to 20 diversified ETFs that align with your goals and risk tolerance.
Generally speaking, fewer than 10 ETFs are likely enough to diversify your portfolio, but this will vary depending on your financial goals, ranging from retirement savings to income generation.
Are high yield ETFs risky?
ETFs are less risky than individual stocks because they are diversified funds. Their investors also benefit from very low fees. Still, there are unique risks to some ETFs, including a lack of diversification and tax exposure.
VOO - Performance Comparison. In the year-to-date period, VYM achieves a 7.27% return, which is significantly lower than VOO's 10.06% return. Over the past 10 years, VYM has underperformed VOO with an annualized return of 10.06%, while VOO has yielded a comparatively higher 12.94% annualized return.
Types of dividends
Moreover, the investor must own the shares in the ETF paying the dividend for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. This means if you actively trade ETFs, you probably can't meet this holding requirement.
Yields from 2% to 6% are generally considered to be a good dividend yield, but there are plenty of factors to consider when deciding if a stock's yield makes it a good investment.
Dividend ETFs are ultra-cheap, they can reduce overall portfolio risk and they account for a surprisingly large percentage of total returns. Dividend ETFs are ultra-cheap, they can reduce overall portfolio risk and they account for a surprisingly large percentage of total returns.
