Do you like the idea of ever-growing dividend income, but aren't interested in keeping tabs on a portfolio of individual stocks? There's a simple solution: Own a handful of exchange-traded funds (ETFs) instead. Not only will you need fewer total holdings, but you may never need to swap these investments out with different ones. The companies managing these funds will handle this work as needed on your behalf.
With that as the backdrop, here's a closer look at three dividend growth ETFs to buy and hold forever if you've got $1,000 -- or more -- you're ready to put to work. Notice that each one is measurably different than either of the other two.
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Dividend investors who have already explored exchange-traded funds have likely considered the ProShares S&P 500 Dividend Aristocrats® ETF (NYSEMKT: NOBL). (The term Dividend Aristocrats® is a registered trademark of Standard & Poor's Financial Services LLC.) These blue chip stocks are the market's elite dividend names, raising their payouts annually for at least the past 25 years. Quality names like these also tend to outperform the benchmark S&P 500 (SNPINDEX: ^GSPC).
But an ETF built to reflect the overall performance of the Dividend Aristocrats® may not actually be the best way to achieve the most overall growth you can with a dividend-oriented exchange-traded fund. The Vanguard Dividend Appreciation ETF (NYSEMKT: VIG) does better, with or without its dividends.
What gives? At least part of the performance disparity reflects a slightly different standard to become one of the fund's constituents. See, the Vanguard Dividend Appreciation ETF is built to mirror the S&P U.S. Dividend Growers Index, which only requires 10 consecutive years of dividend growth for inclusion. This index also excludes the 25% of otherwise-eligible stocks with the highest yields, as these high dividend yields often indicate brewing trouble.
The thing is, this seemingly small strategic twist obviously works. The Vanguard fund's stocks are clearly performing better, and are doing so without dramatically crimping the benefits of the fund's dividend payments. Although the Vanguard ETF's trailing yield of 1.7% is lower than the Dividend Aristocrats® yield of just under 2.5%, it doesn't take long for the Vanguard Dividend Appreciation ETF to offset this slight difference with its own impressive dividend growth and superior capital gains.
That being said, don't give up on the idea of owning dividend royalty. Just change your tack by applying the same standard to a different subset of stocks.
Many people don't realize it, but Dividend Aristocrats® aren't just stocks that have upped their dividends payments for at least the past 25 years. These companies must also be part of the S&P 500 large-cap index.
Just because a stock isn't part of the S&P 500, however, doesn't mean it doesn't have an impressive dividend pedigree worth plugging into. Standard & Poor's also manages the S&P 400 Dividend Aristocrats® Index, consisting of mid-caps that have upped their annual dividend payments in each of the past 15 years. As of the latest look, 48 different stocks qualify for inclusion in this index, including Williams-Sonoma, Ryder Systems, and insurer Old Republic, just to name a few.
Holding a stake in this sliver of the market via the ProShares S&P Midcap 400 Dividend Aristocrats® ETF (NYSEMKT: REGL) accomplishes a couple of important things. First, it offers easy and managed access to stocks that aren't always easy to find, with ProShares handling the necessary buying and selling. Second -- and far more important -- this ETF simply offers its owners exposure to mid-cap stocks, which boast a measurably better long-term performance track record than the S&P 500 does.
This makes sense, of course. Mid-cap-sized companies tend to be nimbler than their large-cap counterparts. They're also often in their sweet spot of growth -- beyond their start-up phase, and en route to a more dominant size by virtue of leveraging a new idea, product, or technology.
Finally, add the Invesco S&P 500 High Dividend Growers ETF (NYSEMKT: DIVG) to your list of dividend growth exchange-traded funds to buy and hold forever.
Never heard of it? There's a reason. It's a fairly new fund, having only launched in late 2023. And as is the case with most young ETFs, this one is still pretty small too, with only a few million dollars' worth of assets currently being managed.
Don't let its small size deter you, though. This fund ticks off a lot of mostly unchecked boxes for many investors, complementing your current holdings.
At first blush, this doesn't seem like it would be the case. There are several seemingly similar fantastic dividend-growth funds to consider (including both of the aforementioned ETFs). The S&P 500 High Dividend Growers ETF is relatively unique, however.
Meant to mirror the S&P 500 High Dividend Growth Index, this fund holds exactly 100 of the S&P 500's stocks with the highest forecasted dividend yield growth among companies that have raised their dividend payments in each of the past five years. The somewhat unusual inclusion criteria effectively makes this ETF a value fund, with an average trailing price-to-earnings ratio of 15.6 and a forward-looking one of under 14.
Its trailing dividend yield is also just a tad over 3% right now. This fund of course also provides exposure to a half of the stock market that's undeniably trailed the growth half for years now -- a dynamic that could be on the verge of sweeping change now that interest rates are back above record lows.
Yet another reason this ETF would be a smart complement to most peoples' current portfolios at this time is that it just holds great dividend-paying stocks that often go overlooked. Some of its top holdings right now include tobacco giant Altria, investment management outfit Franklin Resources, and drugmaker Bristol-Myers Squibb, just to name a few -- stocks with a steady collective cadence of above-average dividend increases.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bristol Myers Squibb, ProShares S&P 500 Dividend Aristocrats® ETF, Vanguard Dividend Appreciation ETF, and Williams-Sonoma. The Motley Fool has a disclosure policy.