If you are looking for a source of income that outlives you, look into dividend ETFs that are time-tested over decades. The stock market today looks nothing like the stock market two decades ago, and it is likely that many of the top 20 companies will look alien to you in 2045.
This means betting on very narrow sector-based ETFs should be out of the equation. Funds that are overly reliant on options should also be avoided, since a short-selling ban like the one in 2008 could be catastrophic for them. Something like that happening in your lifetime is certainly possible.
You can always hold those ETFs as satellite holdings, but if your aim is to have five “core” dividend ETF holdings that will compound forever, the following five are worth it:
Schwab US Dividend Equity ETF (SCHD)
Schwab US Dividend Equity ETF (NYSEARCA:SCHD) is a passively-managed ETF that tracks the Dow Jones U.S. Dividend 100 Index.
It owns 103 large-cap U.S. companies that have paid dividends for at least ten consecutive years. The ETF then scores them on four pillars: cash-flow-to-total-debt, return on equity, dividend yield, and five-year dividend growth.
The 103 holdings with the best composite scores are market-cap weighted, so the portfolio tilts toward sturdy cash generators. This includes AbbVie (NYSE:ABBV), Chevron (NYSE:CVX), The Home Depot (NYSE:HD), and Altria (NYSE:MO). All of these companies have long histories and are well-positioned to keep delivering income.
SCHD gives you a 3.8% dividend yield with an expense ratio of just 0.06%, or $6 per $10,000.
First Trust Morningstar Dividend Leaders Index Fund (FDL)
First Trust Morningstar Dividend Leaders Index Fund (NYSEARCA:FDL) is an index ETF that tracks the Morningstar Dividend Leaders Index. The fund owns 100 large and mega-cap U.S. companies that have maintained consistent and sustainable dividend policies. Stocks are screened for flat or positive 5-year dividend growth and for estimated earnings that cover the indicated dividend.
The final list is ranked by indicated yield and is weighted by the dollar value of dividends they are expected to pay, with a 10% cap on any single holding.
This has worked wonderfully, and FDL has been one of the most consistent and stable ETFs in the past decade. It yields 4.21% and has an expense ratio of 0.43%, or $43 per $10,000.
Vanguard High Dividend Yield Index Fund ETF (VYM)
Vanguard High Dividend Yield Index Fund ETF (NYSEARCA:VYM) tracks the FTSE High Dividend Yield Index. It holds ~583 stocks that are forecast to pay above-average dividends over the next 12 months, excluding REITs.
The portfolio is market-cap-weighted, so the biggest, most stable dividend payers are its top holdings. This also lets it avoid value traps because the fund simply owns the higher-yielding half of the dividend-paying universe.
If large-cap dividend growers keep raising payouts and rates stabilize, VYM should keep cranking out a cash stream that beats the broad market and remain stable.
The dividend yield is lower at 2.4% with an expense ratio of 0.06%. However, you get solid diversification that very few ETFs can provide.
Vanguard International High Dividend Yield Index Fund (VYMI)
Vanguard International High Dividend Yield Index Fund (NASDAQ:VYMI) tracks the FTSE All-World ex-US High Dividend Yield Index.
The fund starts with large and mid-cap companies outside the U.S., removes REITs and stocks not expected to pay dividends in the next year, and then ranks the rest by expected dividend yield. It keeps the highest-yielding half of that universe and weights each stock by market capitalization.
You get exposure to big international firms that can buck the trend if the domestic market is ever hit by volatility. The USD is currently undergoing a decline, and these international firms have delivered higher relative returns.
VYMI is up 25.3% year-to-date, and it has a dividend yield of 3.3%. The expense ratio is 0.17%, or $17 per $10,000.
Virtus InfraCap US Preferred Stock ETF (PFFA)
Virtus InfraCap US Preferred Stock ETF (NYSEARCA:PFFA) is not like the other ETFs in this list. It invests in preferred shares that are issued by companies with market caps over $100 million.
These stocks sit between bonds and common stocks and pay a fixed or floating rate that is distributed before common dividends. This leads to very high yields for ETFs that focus on them.
However, the caveat is that you are forgoing upside, but the environment today allows you to capture significant upside due to rate cuts.
PFFA is sitting at a discount of ~17% and can recover as interest rate cuts push more investors away from bonds and towards preferreds.
PFFA has a 9.09% yield and pays monthly. The expense ratio is 2.48%, or $248 per $10,000, though this is mostly due to interest payments. The management fee is 0.80%.
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