Dividend Growth Investing Made Easy with ETFs
The following is a guest post from Tom who runs Dividends Diversify about our shared passion for income investing.
Growing up, I was always taught that anything good in life wouldn’t be easy. But, I’m here to refute that point today.
First of all, an introduction. My name is Tom and I run the blog Dividends Diversify. I write about all things personal finance on that site but more importantly, my favourite topics are about dividend growth stocks and how to invest money to produce income.
Because of our mutual interest in dividends and dividend growth investing, Mark asked me to write up a few of my thoughts on how I believe dividend growth investing can be made easy with a few simple purchases.
Make it easy via Exchange Traded Funds (ETFs)
What is an ETF?
Follow Mark’s great introductory post here.
Essentially, an exchange-traded fund (ETF) is a collection of securities, such as stocks that I know Mark enjoys buying, that tracks an underlying index. An ETF gets its name because it is traded on a stock exchange just like an individual stock.
How can you gain the big benefits of dividend growth investing via ETFs?
In a word: diversification.
By making one (or a few) investments in your brokerage account, depending on the ETF, you can get immediate ownership in many dividend growth stocks.
I feel diversification is one of the primary differences (and benefits) between buying a single stock versus an ETF. In that light, investing by owning equity, dividend ETFs can make dividend growth investing easy!
Let’s check out a few popular ETFs that invest in and hold many dividend stocks.
1. Vanguard High Dividend Yield ETF (VYM)
VYM has over 400 individual dividend stock holdings. That’s right; you get over 400 dividend stocks with one single purchase. The 10 largest holdings comprise nearly 27% of the fund.
Several sectors are heavily represented. Those sectors are financials, consumer goods, and health care.
And the stocks from those sectors are big-name companies. They include JP Morgan Chase, Johnson and Johnson, and Procter and Gamble to name just a few.
I have invested in VYM for many years. VYM provides a juicy combination of dividend yield and dividend growth for my dividend income goals for retirement.
Mark – these low-cost dividend ETFs can pay you cash for life although distributions can vary!
I mainly hold VYM in my retirement accounts here in the U.S. I prefer ETFs in my retirement accounts for the aforementioned diversification they provide. I do not like the potential risk of one stock negatively impacting my retirement funds.
2. Vanguard Dividend Appreciation ETF (VIG)
VIG is another Vanguard fund that holds about 180 individual dividend stock holdings. So, with VIG, you will own 180 dividend stocks with one single purchase. You might notice that with fewer holdings, VIG is a more concentrated fund than VYM.
The 10 largest holdings comprise 35% of the fund’s investments. Recently, Microsoft was VIG’s top holding.
You might be wondering what the main difference is between VYM and VIG. Well, VIG sacrifices some current dividend yield in exchange for companies that are growing their dividends more quickly. So, VIG will offer less dividend income today but in exchange, an investor can expect faster dividend growth in the future.
I do not currently invest in VIG. VYM more closely meets my investment criteria for current income and an acceptable level of future income growth.
And herein lies a key point for any investor to consider: don’t add more holdings than necessary. Doing so will require more time to monitor your investments. It may also create an unnecessary overlap of holdings in your investments. Further, there might be additional transaction costs incurred with more funds owned. Avoid that where you can.
As Mark always says on his site, to support long-term investing success:
- Invest in low-cost funds for diversification.
- Keep your transaction costs low.
- Rinse and repeat until wealthy.
Here is another interesting point I noticed while researching and writing this article for Mark and his readers. Microsoft happens to be my largest individual stock holding. Years ago, I didn’t expect that to be the case when I made my initial investment in Microsoft. However, I was fortunate to establish my position when the stock was out of favor and seemingly undervalued back in 2011. This sidebar brings me to another great point about dividend growth investing easy: look for dividend paying stocks with good values and stay invested.
Mark tells you why you need to stay invested here.
This way, you can largely sit back and let the companies you own or the funds you own with various companies do all the hard work for you.
3. Vanguard International High Dividend Yield ETF (VYMI)
As a U.S. resident, I have a big home country bias when it comes to dividend growth stocks. Almost all of my dividend stock holdings are U.S.-based. Rightly or wrongly, I find it hard to research and understand enough foreign companies to achieve adequate diversification across the globe.
On the other hand, I do want to have some exposure to companies that are not located in the U.S. So, my go to fund is VYMI.
Compared to the other two funds above, VYMI is a relatively new investment option from Vanguard. It was established in 2016. VYMI holdings consist of almost 1,000 individual dividend stocks. And the top 10 largest holdings comprise just 16% of the fund’s investments.
Many different countries are represented throughout the portfolio. The largest are developed countries like the United Kingdom, Japan, and Australia.
Foreign companies often pay higher dividends than U.S. companies, which gives VYMI an advantage when it comes to earning income from your portfolio. That said, higher yield can mean dividend growth can be more erratic. You can’t have it all!
Because VYMI was a late entrant to the international dividend ETF space, I do not own it. Instead, I have held long term positions in the SPDR S&P International Dividend ETF (DWX) and Invesco International Dividend Achievers ETF (PID).
Mark outlined some great International Dividend ETF choices here.
Given VYMI is now available, I am considering selling DWX and PID and consolidating the proceeds into VYMI. I see several advantages in doing this:
- Lower management fees
- Greater diversification
- Portfolio simplification from 2 ETFs to just 1 international dividend ETF.
4. S&P 500 Dividend Aristocrats ETF (NOBL)
As a passionate dividend investor, I can’t go without mentioning low-cost ETF NOBL. This is the only ETF (that I know of) that focuses exclusively on the S&P 500 Dividend Aristocrats.
Dividend aristocrats are those super high-quality companies that have increased their annual dividend payments to investors for at least 25 years in a row.
The fund holds stocks of companies that are the “whos-who” of dividend payers from the U.S. I believe this fund is a great option for anyone interested in making U.S. dividend growth investing very easy.
At the time of this post, while I’m a fan of NOBL I do not personally own this fund. Why? My portfolio of individual dividend stocks is already heavily populated with dividend aristocrats.
This is largely the same approach that Mark takes with his Canadian stocks.
He unbundled his Canadian dividend ETF for income. I would say he’s done rather well with this chart!
I have done a bit of that myself for my U.S. stocks.
Dividend Growth Investing Made Easy Takeaways
I enjoy analyzing and picking the specific dividend stocks to invest in. But, that process isn’t for everyone.
This is where dividend growth investing via some low-cost U.S.-listed dividend ETFs can make this process rather easy for you.
In summary, here are the four (4) high-quality, low-cost ETFs we discussed today you too can own for cash flow and rising income over time:
- Vanguard High Dividend Yield ETF (VYM)
- Vanguard Dividend Appreciation ETF (VIG)
- Vanguard International High Dividend Yield ETF (VYMI)
- S&P 500 Dividend Aristocrats ETF (NOBL)
For more reading, make sure you check out Mark’s Dividends page dedicated to his income journey to semi-retirement in the coming years.
For U.S. stock reviews including my journey about growing dividend income you can check out my site as well.
Thanks for reading and sharing, and of course to Mark for his site real estate to share my thoughts with you!
I look forward to your comments on this post!
As always, great articles from Mark and other readers. This roller coaster ride is throwing all stocks into great chaos, with the stock markets going up and down like a yoyo!!! Personally, there are a few stocks that can benefit from this corona virus environment, like buying the following stocks that will go inversely with the general stocks. They are APT, CODX, TOMZ as they help to fight the virus. Mark, what do you think about these stocks? They can go up many times and you will be laughing all the way to the bank!!!
Fair Ken, re: COVID-19 stocks. We’ll see…I haven’t invested in any yet but never say never 🙂
I prefer some of the more boring and dependable stocks and then I just index invest the rest. The process has treated me well for the last decade.
Kind words, thanks for your readership 🙂
How are you investing these days?
Once again, good reading and food for thought. Thanks Mark and Tom. Just want to add a comment and question. Like other Canadians, I’m transferring all I can from my RIFs to my TFSAs. Eventually, I see a greater portion of my savings in TFSAs. To avoid withholding tax on dividends, I’m sticking with CN companies and ETFs. I did buy Microsoft in my TFSA not realizing the dividend would be reduced significantly. I’m guessing ETFs holding US and international companies in TFSAs would also be slammed by withholding taxes. Is that so?
You got it Paul, good or bad, U.S. stocks and U.S.-listed ETFs are hit with 15% withholding taxes on dividends inside the TFSA, including the USD $$ side of the TFSA.
I’ve got some of that information on my Dividends page:
“I hold Canadian dividend paying stocks in my non-registered (taxable) account and inside our Tax Free Savings Accounts (TFSAs). Why?
Canadian dividend-paying stocks receive favourable tax treatment from our government. These stocks are eligible for the Canadian dividend tax credit if left unregistered (outside TFSA and RRSP accounts). The plan is to own 30-40 Canadian dividend paying stocks for tax-friendly (taxable account) and tax-free (TFSA) dividend income.
I keep a few U.S. dividend paying stocks in my RRSP. Why?
Like I wrote to you above, I hold a few U.S. blue-chip stocks for U.S. dollar income and long-term growth. Unfortunately U.S-dividend paying stocks do not receive any favourable tax treatment from our Canadian government. I keep U.S. stocks inside an RRSP to avoid paying any withholding taxes (15%).
Other than the intention to own a few U.S. stocks inside my RRSP I invest in low-cost U.S.-listed ETFs. We will continue to use ETFs more over time inside our RRSPs leading up to early retirement.”
There are some international companies that should be free of withholding taxes inside the TFSA:
Not tax advice, just sharing what I know 🙂
Great article Tom,
I’m trying to compliment my index etfs with some dividends etfs so i added ZDY to my us holdings wich is VUN and i do have ZDI and XEF for international as for canadian i used to have XEI and VCN but i sold my XEI and replaced it with ZLB , i like the monthly dividends that comes from ZDI and ZDY specially in a market downturn .
I recall I’ve reviewed ZDY in the past as a good low-cost U.S. fund in CDN $$.
There are also many fans of this site that like ZLB, the low-vol fund for the CDN market. Top holdings include big utiliites and a few REITs. I already own EMA, CU, BEP, FTS, REI.UN, directly so I figure I got that low-vol spectrum covered 🙂
One question on Vanguard ETFs: while VIG has a Canadian equivalent in VGG, is there a Canadian equivalent for VYM?
Thanks for your comment.
VYM = Large Cap High Dividend Yield for U.S. only. To my knowledge, there is no CDN equivalent like Vanguard US VIG = Vanguard Canada VGG.
iShares has this, if you are interested but it only holds 75 stocks and CDN-hedged so over time, you’ll lose a bit on fees/spreads with CDN-hedged if you’re looking for a US dividend ETF hedged in CDN $$ like this one:
If you are looking for a decent high-dividend CDN ETF to go with VYM, then XEI or VDY could be considered but the latter is very high in financials. Too much for me in fact 🙂
Hope that helps!
Very good article by Tom; thanks for inviting him. You both give comfort during these uncertain times. I have sold nothing, and have used the downturn to buy a couple of great names (CN, AQN) and add to another (T), each of which I sold some time back and should not have done so. Got a good price though! Press on.
Thanks for the kind words, Doug. Good luck with your investments! On your question below about a Canadian equivalent for VYM, I will defer to Mark. He knows much more about the Canadian investment space than I do. For the most part, I do my non-US investing through VYMI. I do own one popular Candian stock being Enbridge. I inherited it when they merged with Spectra (SE) from the US which I owned at the time and have held ENB ever since. Tom
I like your call on VYMI. I think it’s a great international ETF with decent yield for now and decades into the future.
I would not sell ENB and instead hold for decades to come.
Smart stuff on CNR, AQN and T to load up on. Good dividend payers for decades to come.
Thanks again Mark for letting me write this article for your site and your readers. I can tell from my review of past comments on recent articles here that they are an engaged group of readers, investors and personal finance fanatics (like me)! I really enjoyed putting this together because I’m crazy about dividend investing. And, as a side note, I did consolidate my positions in PID and DWX into VYMI last week for all the benefits I mentioned above. It’s been a crazy 10+ days in the market. But the great thing about investing for dividend yield is that I kind of “root” for the market to go down so I can buy higher yields at lower stock prices. Don’t tell anyone I said that. 🙂 Tom
Thanks very much for your permanent contribution to the site Tom!
I think for many investors that don’t want to unbundle their dividend ETFs like I have in Canada or you have in the U.S., I think some low-cost dividend ETFs can make some great sense for so many investors to help with their income needs AND long-term growth as well.
As for the market, yes, wild ride but I wouldn’t be against another 10% decline or so 🙂