Despite yesterday's strong rally in the stock market, investors still want tangible proof that their stocks are going to deliver the returns they need. The clearest evidence of a fruitful investment is one that puts cash in your pocket, and that's why dividend-paying stocks have become as popular as they are today.
But individual stocks aren't the only way to get access to the best dividend payers in the market. Through exchange-traded funds that focus on dividend-paying companies, you can invest in a basket of stocks that will give you the income you need.
Finding the best dividend ETFs
As with many other popular categories of investments, though, the rise of dividend stocks has spawned many different ETFs that include them in their portfolios. For instance, when Standard & Poor's MarketScope Advisor letter screened more than 1,100 ETFs, it found that more than 10% of them had trailing dividend yields of at least 3%. Even after S&P removed sector-specific funds that didn't provide enough overall diversification, it still had more than six dozen ETFs that met its qualifications.
But in its final cut, only 13 ETFs had what it took to earn S&P's seal of approval. Many of those ETFs are all-purpose broad-market funds, but four ETFs focused in on dividends specifically. Let's take a closer look at these big dividend producers.
From wisdom, Foolishness
The first top ETF provider is WisdomTree, which produced a couple of worthy ETFs. Its WisdomTree Total Dividend (NYS: DTD) tracks an index of stocks whose components are weighted by the value of the dividends they pay. As a result, AT&T (NYS: T) tops ExxonMobil as the biggest holding of the ETF, because the telecom's big 6% yield outweighs Exxon's more modest 2.6%, despite Exxon's being more than twice as big on a market-cap basis. This fundamental weighting is a special characteristic of WisdomTree's ETFs, which sets the provider apart from its ETF competitors.
For the most part, WisdomTree LargeCap Dividend (NYS: DLN) is practically identical to the Total Dividend fund. Because large-cap stocks pay the vast majority of dividends, this ETF merely has slightly higher allocations to the stocks that top the other ETF's holdings. With distribution yields of 3.1% for LargeCap Dividend and 3.0% for Total Dividend, either one makes a worthy addition to a dividend portfolio.
Following the Vanguard
Another fund that made S&P's list was Vanguard High-Yield Dividend (NYS: VYM) , which tracks an index of particularly high-yielding stocks that have long histories of maintaining above-average payouts. With a current SEC yield of 3.6%, it's easy to confirm that the ETF is doing its job.
With a market-cap weighting method, the usual suspect, ExxonMobil, leads the holdings list. But with more than 400 stocks in the ETF, you'll get plenty of diversification to go with your healthy payout. And with an expense ratio of only 0.18%, it's hard to beat the price.
The not-so-itsy-bitsy SPDR
Finally, the SPDR S&P Dividend (NYS: SDY) carries a yield of 3.4%. It tracks the S&P High Yield Dividend Aristocrats Index, which includes companies with at least a 25-year track record of increasing their dividend payouts at least once per year. By focusing on the highest-yielding members of that elite list, the ETF weeds out some companies that have largely coasted along on their historical record, giving token increases but not truly sharing in their good fortune with shareholders.
The quarter-century history requirement is a tough one to meet, and as a result, you'll find some unlikely names among the stocks within the fund. Pitney Bowes (NYS: PBI) has the highest weight in the fund at just over 4%, while CenturyLink (NYS: CTL) takes the No. 2 spot. With only about 60 stocks in the portfolio, SPDR S&P Dividend avoids the top-heaviness you find in some other dividend ETFs.
Never stop looking
Any of these four ETFs will give you a reasonable place to start your journey toward becoming a better dividend investor. Although they each have their particular quirks, all of them have the benefit of rewarding fund investors with the healthy payouts they've earned. In a rocky market, that's exactly what many investors just like you want to see.
For more on exchange-traded funds, make sure you've taken a look at The Motley Fool's free special report on ETFs. You'll find the names of three ETFs we think have the potential to hit home runs over the long haul.
At the time thisarticle was published Fool contributor Dan Caplinger is always on the lookout for more money. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of AT&T. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy never stops paying dividends.
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