Market volatility and economic uncertainty have many investors seeking reliable ways to build wealth. While technology stocks have dominated returns since the 2008 financial crisis, surpassing even the red-hot real estate sector, they often experience dramatic price swings and rely heavily on continued advances in artificial intelligence and automation.
Dividend-paying stocks, particularly those that increase their payouts annually, have proven to be dependable wealth builders since the start of the 20th century, regardless of market conditions. The key lies in compound growth, where reinvesting growing dividends while making regular investments can create substantial wealth within a decade and potentially multigenerational riches over longer periods.
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Rather than tackling the challenge of selecting individual dividend stocks, investors can turn to dividend-focused exchange-traded funds (ETFs) with low-expense ratios and high-quality holdings. Here are three dividend ETFs that could help build lasting wealth.
A low-cost approach to dividend investing
The iShares Core Dividend Growth ETF(NYSEMKT: DGRO) stands out with its minimal 0.08% expense ratio and focus on companies with sustainable dividend growth. The fund tracks the Morningstar U.S. Dividend Growth Index, which specifically targets U.S. companies with strong financial health and consistent dividend increases.
Companies must demonstrate at least five years of uninterrupted dividend growth to be included in the fund. This requirement helps ensure that the portfolio consists of financially stable businesses with a proven commitment to shareholder returns.
The fund's largest positions demonstrate its focus on established market leaders. ExxonMobil, Microsoft, Apple, JPMorgan Chase, and Chevron represent the fund's top-five holdings. Its annualized yield presently stands at a generous 2.2%.
Over the prior 10-year period, the iShares Core Dividend Growth ETF has delivered a total return (assuming dividends were reinvested and without accounting for tax liabilities) of 216%.
High-yield focus for immediate income
The Vanguard High Dividend Yield ETF(NYSEMKT: VYM) targets companies paying above-average dividends relative to the broader U.S. market. The fund's expense ratio of 0.06% makes it one of the most cost-effective options in its category.
The fund's portfolio leans toward value-oriented sectors such as financials, healthcare, and consumer staples. The ETF's yield typically exceeds that of the S&P 500 by a significant margin.
Speaking to this point, the Vanguard High Dividend Yield ETF currently offers a yield of 2.83%, more than double the average yield of the benchmark S&P 500, which presently stands at 1.32%.
The fund's top-five holdings, consisting of Broadcom, JPMorgan Chase, ExxonMobil, Procter & Gamble, and Johnson & Johnson, speak to its focus on high quality. These core holdings are all well-established companies with exceptionally strong dividend histories.
The Vanguard High Dividend Yield ETF has rewarded shares with a 165% total return over the prior 10 years. That's not market-beating performance, but it is substantial for a dividend-focused ETF.
Quality and growth combined
The Schwab U.S. Dividend Equity ETF(NYSEMKT: SCHD) stands out by combining rigorous quality screening with dividend-growth potential. The fund tracks the Dow Jones U.S. Dividend 100 Index, carefully selecting companies that demonstrate both strong fundamentals and a proven track record of reliable dividend distributions.
The Schwab U.S. Dividend Equity ETF boasts an attractive 3.47% yield -- the highest among its peers in this analysis -- while maintaining an exceptionally competitive 0.06% expense ratio, making it one of the most cost-efficient options in the high-dividend yield ETF space.
The ETF's stringent selection process applies multiple filters focusing on financial strength, consistent dividend growth, and profitability metrics. A key requirement is a minimum 10-year history of consecutive dividend payments, establishing a high threshold for inclusion that helps ensure portfolio quality.
The fund's top-five holdings exemplify its focus on blue chip dividend payers: The Home Depot, Verizon Communications, Cisco Systems, BlackRock, and Texas Instruments. These industry giants showcase the ETF's emphasis on companies with robust cash flows and well-established dividend programs.
Over the past 10 years, this ETF has generated an impressive total return of approximately 204%. While this performance doesn't surpass the S&P 500's returns, it represents exceptional results within the dividend ETF category, highlighting the fund's ability to balance income generation with capital appreciation.
Building wealth through dividends
This methodical approach to dividend investing through ETFs based on this theme offers simplicity and effectiveness for long-term wealth building. These funds provide broad exposure to dividend-paying companies while maintaining low costs and high standards for inclusion.
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*Stock Advisor returns as of October 28, 2024
JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. George Budwell has positions in Apple, BlackRock, Chevron, JPMorgan Chase, Schwab U.S. Dividend Equity ETF, and iShares Trust-iShares Core Dividend Growth ETF. The Motley Fool has positions in and recommends Apple, Chevron, Cisco Systems, Home Depot, JPMorgan Chase, Texas Instruments, and Vanguard Whitehall Funds-Vanguard High Dividend Yield ETF. The Motley Fool recommends Broadcom, Johnson & Johnson, Tjx Companies, and Verizon Communications. The Motley Fool has a disclosure policy.
