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Dividend ETF – what is it? Which one should you buy in 2020?

I assume that you probably heard some buzz around the Robin Hood as a quick, easy and convenient way to invest. If you’d like to earn some money on the side day trading, that’s a good choice. 

But let’s say that you thinking about an investment strategy for 5, 10 or even 20 years. Maybe you see the stock market as your retirement play, as many Americans and Europeans do. It’s hard to imagine your everyday life If you start your day with nervously scrolling through economic news and reconfiguring your investment portfolio, right? In such vast timeframe it’s wise to choose a ‘hands-off’ approach. Let’s consider the best dividend ETF for long-term investment.

ETF that pay dividends – basic information

Let’s begin with some fundamentals. An ETF or Exchange-traded fund is basically a basket of stocks (up to 2000 and more) sold together. Each ETF has its own purpose and structure defined by underlying index tracked by the fund. For example, the well-known SPDR S&P 500 ETF tracks, as you probably guessed, the S&P 500 index on the New York Stock Exchange. 

OK, we know what an ETF is – now let’s move to dividend funds. It’s easy – dividend ETF is an ETF that pay dividends. That’s it. So when you bet your savings on best dividend ETF for your needs, you will not only profit from its appreciation (fueled by underlying index), but you will receive a regular passive income throughout your investment period. Quarterly payment hitting your bank account is a huge incentive to choose ETFs with dividends. But there is more to it – you probably heard some wise words about the power of compound income, am I right? Consider reinvesting all received dividends back into your dividend ETF of choice. Do it for at least a 5 years – and enjoy the ‘snowball effect’ on your net worth!

ETFs with dividends – a closer look

You probably wondering now – how are dividends paid on ETFs? It’s really simple. Everything works exactly the same as with your classic dividend stock. You’re paid quarterly, right after ‘financial results season’ when companies reveal their profits and decide how big piece of this tasty cake goes to hungry shareholders. 

Although many popular ETFs don’t have ‘dividend’ in their names, It doesn’t mean they won’t provide you with some passive income. For example – Invesco QQQ, a very popular index fund which tracks the Nasdaq-100 Index including many tech giants such as Facebook or Alphabet, offers 0,63% dividend yield. It’s not much, but it’s a sweet bonus to rapidly growing returns. 

It’s hard to determine which one is the best dividend etf 2020. There are many of them on the market and each has its appeal. Let’s dive into two popular dividend etfs to buy, hold and profit from in years to come. 

Vanguard High Dividend ETF (VYM)

VYM has a 3,66% dividend yield, which is really decent number. When we look under the hood of VYM ETF, it’s clear that we deal with a classic blue chip ETF with dividend. If you’re not familiar with the Wall Street slang, let me explain: ‘blue chip’ stocks are well-established companies with strong brands and long track record of financial stability and growth. Think about telecom giants such as AT&T, wealthy banks (JP Morgan Chase & Co) or consumer goods old guard (Johnson&Johnson, Coca-Cola). 

The underlying index tracked by VYM is FTSE High Dividend Yield Index which includes carefully selected high-dividend paying brands from US. What’s very appealing about VYM is its really, really small expense ratio of barely 0,06%. It’s the fee that fund management charge you with when you decide to invest in it. To understand it better, let’s say that the underlying index achieved a yearly growth of 20%. Your initial investment has grown slightly less (f.e. 19,9%) because the ETF charged you a given fee.

To conclude our review, VYM ETF with its strong fundamentals and low expense ratio of 0.06% is one of the best dividend ETFs to buy in 2020. 

WisdomTree U.S. Dividend Growth Fund (DGRW)

You probably wonder now – OK, I would like to invest in a dividend ETF, should I expect that my dividend income stays forever the same? Well, It depends on what index fund you choose. If it’s VYM ETF, you will get your dividends at a quite steady level – which is good for those looking for peace of mind in the long run. But there are some alternatives. 

Increasing dividend ETF, such as DGRW created by WisdomTree, is marketed as ‘forward-looking’. This fund is betting on companies that are most likely to increase dividend yields in coming quarters and years. DGRW has a 2,24% yield as for now, but it’s designated to up this number in future. With rather low expense ratio, this increasing dividend ETF looks really attractive.

DGRW is a really attractive choice because of its payout policy – you receive your dividend on monthly basis. Which is great, if you’re looking for a passive income stream to replace your hard-earned salary. Otherwise, it doesn’t really make any difference – declared dividend yield is always measured annually. 

Other dividend ETFs to buy

There are many rules in investing world, but one seems to be the most important of them all – always diversify your portfolio. That being said, I encourage you to look into other markets. But don’t waste time on searching for individual stocks to buy, just find yourself a high dividend emerging market ETF and put 10 or maybe 15% in it. 

And what about gold, you ask? Is there a gold ETF with dividend? Or your pretty yellow metal just shines in a vault, waiting for you to sell it with a hefty profit margin? Sadly, the latter is true. But there is a way to enter gold market and celebrate a payday every three months! Consider investing in one of gold miners ETFs which track performance of mining companies. When gold price goes up, their profits follow the trend.

Same rule applies to oil. You can’t buy a commodity ETF and expect a dividend, but you should consider getting into an oil ETF with dividend which tracks oil companies in the US or globally.

Bottom line

Of course there are many more dividend growth ETF on the market and you should take a deeper look into them. Do your own homework and find out what is the best dividend paying ETF for your long-term investment.Remember, when it comes to investing, thorough research is your best friend! 

Jakub Borowiec
Jakub Borowiec
Financial markets enthusiast. I studied management at the University of Economics in Wroclaw.
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