The 10 best dividend ETFs for high distributions!
Investing in dividends is the oldest investment strategy in the world – and ETFs are an ideal way to put it into practice! But which dividend ETFs make sense, which products offer high long-term distributions, and what should you look out for when choosing one? Take a look at my ten favourite dividend ETFs to find out!
In brief:
- To find good ETFs with distributions, you should consider not only the dividend yield but also the volume, costs and tracking difference.
- The payout interval is less important, but can have a positive psychological effect.
- Bond ETFs are an attractive option for high distributions in the current environment.
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How the best dividend ETFs work
Successful companies can afford to pass on some of their profits to their investors. Such dividend payments have been delighting investors for around 1,000 years – even before publicly accessible stock exchanges existed! They are therefore one of the oldest financial strategies in the world.
The basic concept remains unchanged to this day: anyone with capital can use it to purchase shares in a company, i.e. a stake in the company, which offers a high distribution (= dividend). The dividend is linked to the number of securities you hold. The more shares you own, the greater your share of the profits.
ETFs have made this method even easier and more practical in recent years. Exchange traded funds contain stocks from dozens or even hundreds of companies. This ‘basket of stocks’ is automatically compiled according to defined rules (indices).
In the case of dividend ETFs, these are companies with corresponding profit distributions. If you invest in such a fund, you receive shares in all of the companies it contains – and their dividends!
This allows you to invest broadly without much effort and protects you from risky bets on individual companies. After all, dividends are never guaranteed! If profits fail to materialise, companies can decide not to pay dividends or reduce the amount. In addition, the amount of the dividend payment is decided at the annual general meeting.
However, this is not a problem with dividend ETFs, as such companies only make up a small proportion and are simply removed. Although price slumps and even total loss of an ETF are possible, they are considered to be fairly safe investments due to their broad diversification. They therefore represent an ideal asset class for generating passive income, building long-term wealth or implementing an ETF pension plan.
Special case: bond ETFs
My list of the best dividend ETFs includes a number of securities that hold bonds instead of equities. Strictly speaking, they don’t fit the bill, as they pay interest rather than a share of profits. Ultimately, however, the result is the same: you receive regular payments on your investment.
With bonds, investors provide money to a government or company (they lend it, as the name suggests). In return, they receive regular interest payments, which are fixed at the time of issue and remain unchanged throughout the term. At the end of the term, investors receive their capital back, provided everything goes well.
What makes them special is that, unlike most other loans, you can also buy or sell these bonds on the stock exchange! Their price rises and falls depending on various factors. Two points are particularly important here:
- How is the company/government issuing the bonds performing? Problems and poor forecasts make a bond unattractive, because in the worst case scenario, the issuer could go bankrupt and fail to repay the bond!
- What are the current key interest rates? Bond interest rates are set at the beginning of the term based on the current interest rate environment and remain unchanged until repayment. If key interest rates fall, bonds become more attractive because they still offer the old, higher interest rate. If, on the other hand, the key interest rate rises, bonds become less attractive because they still offer the lower interest rate.
Of course, you can also invest directly in bonds without using an ETF. However, exchange-traded funds offer a number of advantages. First, there is no minimum investment amount, which is often high for bonds. Instead, you can set up an ETF savings plan or make a one-time investment with your broker in any amount you choose. Even the smallest amounts are possible.
What’s more, you don’t have to put all your eggs in one basket when you decide to invest. It’s much easier to create a well-diversified portfolio with ETFs and thus minimise your risk than with individual bonds.
The 10 best ETFs with high distributions
A dividend strategy based on ETFs is extremely effective and has proven itself thousands of times over. However, that doesn’t mean you should just buy any old fund and hope for the best! Not all offers are useful or lucrative. I therefore ranked the potential candidates based on three important criteria:
- Dividend yield. Of course, a dividend ETF should primarily generate a high return. But there are a few things to keep in mind! First, you should be aware that the amount of the payouts is not everything. There are companies that pay out high dividends, sometimes even double-digit percentages, but such large amounts are a warning sign that may indicate serious problems.
This brings me to my second point: no payout, no matter how high, can compensate for the price loss incurred by a company in a downward trend. ETF returns always consist of both values. High but not excessive dividend yields and positive price performance are ideal. For my top 10 list, I have therefore selected stocks that have offered good dividends over the past 12 months and whose prices are not in a downward trend.
- Minimum volume. Exchange-traded funds are issued by financial institutions that generate profits from fees. As these costs are relatively low, many investors are needed to make the business worthwhile. If a fund fails to attract sufficient capital in the long term, however, it is at risk of closure. To avoid such annoying setbacks, I have only included ETFs with at least €100 million in assets under management in my list.
- Costs and tracking. The total expense ratio (TER) describes the fees you have to pay as an investor. These can be somewhat higher for some products, so they must be taken into account in the assessment.
I have also included the tracking difference (TD). This indicates how accurately a fund tracks the underlying index. The lower this value, the more you have to spend on an ETF.
Based on these three criteria, I have compiled a list of what I consider to be the best dividend ETFs for you. These include:
1. SPDR Bloomberg US TIPS
The SPDR Bloomberg US TIPS ETF is a US government bond ETF with a special ‘inflation link’. This protects investors in the event of rising inflation and gives the product its name: ‘Treasury Inflation Protected Securities’, or TIPS for short.
This makes this fund interesting for long-term investors who want to implement an ETF savings plan at their own pace. Unlike other bond ETFs, you don’t have to worry about periods of high inflation.
Otherwise, the mechanism is typical for bonds: if key interest rates fall, as is currently the case, bonds with an older, higher interest rate suddenly become much more attractive. Their price rises accordingly. This means that even investors who only want to invest in the short to medium term can benefit here!
The dividend yield is currently solid at 4.01%. At the same time, the fund has very low volatility. So you should not expect large price gains or dramatic crises.
The SPDR Bloomberg US TIPS UCITS (blue) shows low volatility and reliable dividend payments. In comparison, the S&P 500 (red) offers significantly more movement.
With around €280 million in assets under management, its size is perfectly adequate. Costs of just 0.17% per annum and a tracking difference of 0.18 are also attractive. All in all, this is an ideal dividend ETF for anyone who doesn’t want to go on a rollercoaster ride and prefers reliable results instead.
2. iShares MSCI World Energy Sector UCITS ETF USD
The energy sector is known to be very volatile – and so is the MSCI World Energy UCITS! Anyone who bought the ETF in March 2020 saw tremendous growth of over 150% in two years. This makes this fund one of the 10 best ETFs overall. Of course, there was a huge price slump beforehand, which many investors also had to endure.
By comparison, the dividend yield is a modest 3.3%, but combined with the often substantial price gains, this represents an attractive overall package. With costs of only 0.18% and a tracking difference of 0.29, the energy fund is available at a favourable price.
However, the concentration is somewhat unfavourable: the 10 largest companies account for 59% of this dividend ETF! If one of the companies were to get into trouble, the damage to the fund would be relatively large. If you are interested in the energy sector, you need to be very risk-tolerant anyway.
Energy prices appear to be very stable at present. Despite some ups and downs, the MSCI World Energy Sector Index has largely maintained its price in recent months. However, everything can change virtually overnight in this sector – both for the better and for the worse!
3. Invesco Morningstar US Energy Infrastructure MLP
The next dividend ETF on my list focuses on master limited partnerships (MLPs), a special type of company in the United States that offers enormous tax advantages. In return, these companies must pay out almost all of their profits to investors. They are therefore similar to real estate investment trusts, which I compared in my article ‘Top 10 REITs’.
MLPs are very attractive investments for anyone looking for high dividends. The Invesco Morningstar US Energy Infrastructure MLP ETF is impressive proof of this! It combines MLPs from the energy sector and currently offers a dividend yield of 8.38%.
The price gains were also impressive, exceeding 15% over the last twelve months! However, part of this is eaten up by the relatively high costs of 0.5% and the enormous tracking difference of -1.55%.
The Invesco Morningstar US Energy Infrastructure recently performed strongly, combining robust price growth with high dividends.
However, the biggest disadvantage is the structure of this product: it is a synthetic ETF. Instead of actually purchasing shares in the companies it contains, the issuer, Invesco, merely promises to mirror the results and pay dividends. An additional swap fee of 0.75% per annum is also charged for this process, which is added to the other costs.
This means that you are not only making yourself heavily dependent on the US investment company, but also have to pay considerable fees! Personally, I therefore steer well clear of the Invesco Morningstar US Energy Infrastructure MLP; however, due to its high dividend yield, it cannot be left off a list of the best dividend ETFs.
4. SPDR S&P US Dividend Aristocrats
Companies that have continuously increased their dividends for at least 20 years are awarded the unofficial title of ‘dividend aristocrats’. They are a typical component of classic dividend portfolios, as they are highly likely to continue offering good distributions in the future.
The SPDR S&P US Dividend Aristocrats contains 133 such companies from the US. These are predominantly very stable, long-established companies. The dividend yield is very low at 1.93%. In practice, the solid price growth is likely to be much more attractive!
An impressive growth rate of 25% over twelve months compensates for the low dividend of less than 2%.
Investors also buy this dividend ETF because of its perceived security and reliability – the fund size of over €3.6 billion is clear proof of its popularity. The costs of 0.35% per annum and a good tracking difference of +0.09 also speak in favour of this security.
5. Fidelity Global Quality Income
The Fidelity Global Quality Income is very similar to SPDR’s Dividend Aristocrats ETF, as it also invests in high-quality dividend-paying companies. The only difference is that the selection criteria are slightly different.
Despite the high quality of the 226 companies included, you shouldn’t expect too much in terms of dividends: only 2.17% per year can be earned here. The enormous price gains of over 25% in the past twelve months are much more interesting!
The Fidelity Global Quality Income UCITS has performed particularly well over the last twelve months, mainly due to strong price growth.
The total expense ratio is an acceptable 0.4%, and the tracking difference is very good at -0.06%. Another positive factor is that the ten largest positions in this dividend ETF account for only around 26% of its value. The concentration risk is therefore relatively low.
6. iShares European Property Yield
Real estate investment trusts (REITs) are known for their high, often double-digit dividend yields. This is due to a special feature of this type of company: they enjoy enormous tax advantages, but in return must distribute at least 90% of their profits to investors!
A REIT ETF sounds like a sensible way to profit from several such companies at the same time. In the case of the iShares European Property Yield, however, this is only moderately successful. The dividend yield remains rather modest at 2.65%. Recently, however, very strong price gains of over 37% p.a. have been recorded.
The iShares European Property Yield offers a rather unspectacular dividend of 2.65%. However, its price growth over the last twelve months has been more than impressive!
The companies included are based in continental Europe, with a clear focus on Germany. Vonovia accounts for more than 16% of the total dividend ETF – a significant concentration that could quickly backfire in the event of crises or problems!
Costs of 0.4% and a tracking difference of -0.19% are acceptable. Overall, the iShares European Property Yield remains particularly attractive for investors looking to invest in the real estate sector.
7. iShares Asia Property Yield UCITS
If you’re not interested in European real estate or are simply looking for a higher dividend yield, the iShares Asia Property Yield UCITS could be right for you. Here, you invest in real estate companies and REITs from Asia and Australia. You shouldn’t expect huge price gains, but the current dividend of 3.77% is quite attractive.
You shouldn’t expect significant price growth with iShares Asia Propert Yield, but the dividend of 3.77% is very attractive.
However, with costs of 0.59% and a tracking difference of -0.46%, you will have to dig a little deeper into your pockets here. The fund offers good diversification in terms of the companies it holds, with the top position accounting for only 9% of investments.
The geographical spread is less favourable: almost half of the companies are based in Japan. This means that your investment makes you heavily dependent on the Japanese economy. However, the Asia Property Yield ETF is a good choice for investors who are looking for a good dividend yield and want to add Asian assets to their portfolio.
8. iShares Asia Pacific Dividend UCITS
We remain in Asia and take a look at the iShares Asia Pacific Dividend ETF. It contains the strongest dividend payers from Asia and Oceania. Most of the companies here are from Australia (43%), Hong Kong (31%) and Singapore (18%). The Hong Kong Special Administrative Region provides access to Chinese stocks that are not directly included.
This dividend ETF has recently performed very strongly, both in terms of distributions and price gains. It has gained more than 25% in the last twelve months, easily matching Western funds. Added to this is a hefty dividend yield of 5.21%.
The iShares Asia Pacific Dividend ETF is in no way inferior to Western dividend ETFs and combines strong price growth with high distributions.
With a total expense ratio of 0.59% and a tracking difference of -0.88%, you will have to pay slightly higher fees here. However, this has proven to be very worthwhile in the past.
9. Invesco FTSE EM High Dividend Low Volatility UCITS
High volatility, i.e. sharp price fluctuations, are the enemy of dividend investors: they can wipe out hard-earned dividend income in a matter of seconds. The Invesco FTSE EM High Dividend Low Volatility ETF takes precisely this fact into account.
It comprises 175 dividend-paying companies from emerging economies such as China, Brazil and Taiwan. All companies are also characterised by particularly low volatility, meaning that they do not follow typical market price fluctuations, or only do so to a very limited extent.
As expected, price gains are therefore less pronounced than with other investment products. At the same time, however, this dividend ETF suffers less in times of crisis. Added to this is a very attractive distribution of currently 5.22% per annum!
The Invesco FTSE EM High Dividend Low Volatility ETF offers slightly higher stability than other products.
The total costs of 0.49% are good, but are offset by a high tracking difference of -1.65%. There is no concentration on individual companies here, as the largest share is only 3.37%. So if you are interested in stocks from emerging markets and are looking for high dividends, this could be the right choice for you.
10. xTrackers High Yield Corporate Bond
It doesn’t always have to be government bonds! You can also make your capital available to companies and earn high interest rates in return. The xTrackers High Yield Corporate Bond ETF combines particularly large and liquid corporate bonds in a single fund. These are mainly products from Italy, France, the USA and Germany.
The dividend yield is an impressive 5.41%, and the price has risen steadily over the last twelve months. In times of crisis, however, you have to expect massive losses, as many of the companies included in the fund represent a high risk – which is why they pay such high interest rates!
The xTrackers High Yield Corporate Bond ETF is performing well and offers solid dividends of 5.4% per annum.
As with all bonds, you also benefit from the current fall in key interest rates. The corporate bonds contained in this ETF still have the old, higher interest rate. With every interest rate cut, they therefore become even more attractive, which can lead to significant price increases. Now is therefore the ideal time for a dividend ETF like this!
Another particularly exciting feature is that the xTrackers High Yield Corporate Bond is an ETF with monthly dividends. This means that you receive one twelfth of the distribution every month. From a financial perspective, this makes little difference, as your dividend yield remains the same. However, seeing a payment every four weeks is a big psychological boost and motivates you to keep saving!
Conclusion: Dividend ETFs offer something for everyone!
A dividend ETF combines two ingenious concepts: profit distributions from companies and simple, broad-based investment through exchange-traded funds. The selection of such ETFs with distributions is huge, so you can find the right fund for almost any strategy.
The regular payments are extremely convenient and can provide additional income or accelerate your wealth accumulation. However, don’t put all your eggs in one basket and make sure you diversify well. My list of the best dividend ETFs includes stocks from Asia, North America and Europe, for example.
Adding bond ETFs to the mix is also recommended. Strictly speaking, these funds pay interest, not dividends, but the end result is the same: passive income through recurring payments.
But don’t be blinded by very high dividends! Price losses can wipe out your returns in no time. It is therefore important to look for crisis resilience and long-term growth opportunities in all dividend ETFs.
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FAQ – Frequently asked questions
