Intel and Walgreens Boots Alliance are some of the more notable dividend stocks that have cut or suspended their dividend payments this year. The danger for investors is in assuming that a dividend is always going to be safe, only to one day get a horrible surprise.
Unfortunately, there's no way to know for sure if a dividend cut or suspension is going to come. However, one way dividend investors can protect themselves is by going with exchange-traded funds (ETFs). ETFs can provide you with some better protection since you won't be as exposed to just one single investment.
Three ETFs that can give you some solid diversification and can be good sources of recurring income for years and potentially decades are ProShares S&P 500 Dividend Aristocrats ETF (NYSEMKT: NOBL), iShares Select Dividend ETF (NASDAQ: DVY), and Vanguard Dividend Appreciation Index Fund ETF Shares (NYSEMKT: VIG).
ProShares S&P 500 Dividend Aristocrats® ETF
The ProShares fund yields about 2.1%, which is modestly higher than what you would get with the S&P 500 average of 1.3%. But what's appealing about the fund is that it focuses on dividend growth stocks, which have raised their dividend payments for at least 25 consecutive years.
This is a great segment of the market to focus on. For a company to regularly increase its dividend payments, it needs to have strong underlying financials and at least some good growth prospects. That doesn't mean it's a foolproof strategy, as Walgreens was a dividend growth stock as well, but the fund's diversification is what makes the difference here. No stock accounts for even 2% of the fund's overall weight, so if there is a sudden cut or suspension to a dividend, it won't cripple your investment.
The ETF has a position in 66 companies, including some big names such as McDonald's, Colgate-Palmolive, and Johnson & Johnson. There's a good mix of sectors within the fund as well, with the bulk being weighted toward consumer staples (24%) and industrials (23%).
The ProShares S&P 500 Dividend Aristocrats ETF has an expense ratio of 0.35%, which isn't too high. (The term Dividend Aristocrats® is a registered trademark of Standard & Poor's Financial Services LLC.) However, there are lower-cost funds out there. But with quarterly rebalancing and a focus on top dividend stocks, it's arguably worth a bit of a premium to get exposure to some of the best dividend stocks on the market.
iShares Select Dividend ETF
The iShares Select Dividend ETF provides investors with a higher yield of 3.5%, and that's because its focus is more on high-yielding stocks rather than dividend growth stocks. Its criteria for dividend stocks isn't as rigid, focusing mainly on U.S. stocks that have been paying dividends for five years.
It has about 100 holdings with heavy exposure to utility and financial stocks, which together make up roughly 55% of the fund. Another 11% comes from consumer staples.
The fund's top three stocks are Altria, AT&T, and Philip Morris. It may be unnerving to have a couple of the top stocks being in the tobacco industry, where future growth prospects may be questionable. Together, however, these three stocks still account for only slightly more than 7% of the fund's total weight.
Although there is a bit more risk with this fund, given its focus mainly on higher-yielding stocks, the broad diversification it offers can still make it a good option for dividend investors seeking a high payout. The iShares fund has an expense ratio of 0.38%, which is comparable to the ProShares ETF.
Vanguard Dividend Appreciation Index Fund ETF Shares
Rounding out this list is the Vanguard Dividend Appreciation Index Fund. Its yield is the lowest on this list at 1.8% but it also has the lowest expense ratio at 0.06%.
What makes this fund stand out is that it has more than 300 holdings, making it by far the largest and most diversified fund listed here. It focuses on stocks that increase their dividends on a consistent basis. It tracks the S&P U.S. Dividend Growers index, which includes stocks that have increased their dividend payments for at least 10 years.
The ETF is diversified, although it is a bit more skewed toward tech stocks, which account for a quarter of its holdings, followed by financial stocks at 20%, and healthcare stocks, which represent about 16% of the fund's overall weight. Tech giants such as Apple, Microsoft and Broadcom account for just under 13% of the fund's holdings.
Investors who prefer bigger names over higher yields may want the Vanguard fund as it focuses on large-cap stocks and can offer the best option if your goal is to keep your overall risk as low as possible.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Microsoft, ProShares Trust-ProShares S&P 500 Dividend Aristocrats ETF, and Vanguard Specialized Funds-Vanguard Dividend Appreciation ETF. The Motley Fool recommends Broadcom, Intel, Johnson & Johnson, and Philip Morris International and recommends the following options: long January 2025 $45 calls on Intel, long January 2026 $395 calls on Microsoft, short August 2024 $35 calls on Intel, and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
