3 Dividend ETFs I Want to Own in 2024 | The Motley Fool (2024)

Dividends offer people a great answer to the age-old question of how to get rewarded for the risks they take in investing without having to sell the shares they've purchased. Yet if there's a problem with dividends, it's that those payments are never guaranteed. When a dividend gets cut, it often takes the company's shares down with it, meaning that investors lose some or all of the income stream they were expecting as well as a big chunk of the capital that generated it.

To address that particular risk, you may want to consider dividend-focused exchange-traded funds (ETFs). While ETFs won't eliminate the risk that companies may cut their payouts, they will provide diversification that will reduce the net impact on your overall portfolio from the loss of any one dividend.

With that risk-and-reward trade-off in mind, three Motley Fool contributors went looking for dividend-focused ETFs that are worth considering for your portfolio. They picked the JPMorgan Equity Premium ETF (JEPI 0.34%), the Vanguard Real Estate ETF (VNQ -0.69%), and the Vanguard Dividend Appreciation ETF (VIG 0.20%).

3 Dividend ETFs I Want to Own in 2024 | The Motley Fool (1)

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A top yielder from a top bank

Eric Volkman (JPMorgan Equity Premium Income ETF): One fund that's nicely lining investor pockets is the JPMorgan Equity Premium Income ETF. As its name implies, this fund, managed by monster bank JPMorgan Chase's (NYSE: JPM) asset management arm, concentrates on pumping out plenty of income for its shareholders.

Tipping the scales with nearly $31 billion in assets as of the end of November, the ETF has attracted investors with a high-yielding dividend that's often in the low double-digit percentages. While the yield has come down some in recent months (to slightly over 9% on a trailing 12-month basis at present), it still pays out handsomely even when compared to some of the most popular high-yield dividend stocks.

The ETF's portfolio comprises around 120 companies, and a great many of those stocks are familiar names that regularly hand out dividends. The fund is sector-agnostic; tech titan Microsoft was its No. 1 holding as of the end of November, while it also owned big stakes in payment processing giants Mastercard and Visa, plus top U.S. health insurance provider UnitedHealth Group.

Savvy income investors will note that three of those four stocks -- Microsoft, Mastercard, and Visa -- have dividend yields under 1%. In fact, JPMorgan Equity Premium Income has a clutch of popular stocks in its portfolio that don't pay dividends at all. (A notable example of this was its No. 3 holding, Amazon.)

The way it pulls off this trick is by selling specialized covered calls (options to buy a stock held by the seller; such options sold when the issuer does not yet own the shares are known as naked calls). This is a neat way to generate additional income and pump up the fund's payouts to shareholders.

There are, of course, risks to this strategy. It limits the upside potential that the company can enjoy from the underlying stocks, as per a call option the seller must procure the contracted asset at the agreed strike price, forfeiting future upside. That said, JPMorgan Equity Premium Income clearly has a knack for timing and pricing those calls, as evidenced by its persistently rich yield. Income investors averse to stock-picking would be well advised to consider this ETF.

The tables may have turned

Jason Hall (Vanguard Real Estate ETF): Coming out of the global financial crisis 14 years ago, commercial real estate was positioned to deliver solid returns for investors. The Vanguard Real Estate ETF delivered wonderful annualized returns of 12% from 2010 through 2019.

3 Dividend ETFs I Want to Own in 2024 | The Motley Fool (2)

VNQ Total Return Price data by YCharts.

Yet this stellar result was outpaced by an incredible bull market for stocks broadly, with the S&P 500 delivering compound annual growth of almost 14% over the same period.

Then the pandemic happened. Stocks -- fueled for a time by an extended period of cheap money and consumer spending supported by lots of stimulus until the economy could support itself again -- have continued to roar higher while commercial real estate has struggled.

3 Dividend ETFs I Want to Own in 2024 | The Motley Fool (3)

VNQ Total Return Price data by YCharts.

But I think the tide is set to turn back in favor of real estate. Real estate investment trusts (REITs) -- a special class of corporate structure intended to hold real estate assets -- have been pretty beaten down over the past couple of years. The shock of rising interest rates (REITs use a lot of debt to fund their growth) and the huge shifts in the market conditions for commercial real estate categories like office space have resulted in a pretty bad three-year run, but valuations and the overall trajectory look attractive.

And one of the best ways to invest in real estate is via the Vanguard Real Estate ETF, which gives you exposure to more than 150 of the best REITs out there. At current prices, VNQ investors are getting a dividend yield above 4% and a pretty good chance of long-term payout growth. With an expense ratio of 0.12%, it's not the cheapest ETF out there. But it's one that I think dividend seekers will be happy they own.

It's not the size, but the growth that matters most

Chuck Saletta (Vanguard Dividend Appreciation ETF): Dividends are never guaranteed payments. When companies get into trouble, they will often cut their dividends to conserve cash and ensure they can cover their operating obligations. Even companies in the Dow Jones Industrial Average can wind up in that situation, as Walgreens Boots Alliance did earlier this month.

Because of that reality, savvy dividend-focused investors don't just look at a dividend's size, but also how well that dividend is covered, and whether the company is positioned to increase it over time. That's what makes the Vanguard Dividend Appreciation ETF worth considering.

The Vanguard Dividend Appreciation ETF attempts to track the S&P US Dividend Growers Index. That index includes publicly traded U.S.-based companies with at least 10-year histories of increasing their payouts annually, with two key exclusions: REITs, and those companies with high yields in the top 25% of dividend stocks that would otherwise qualify.

That exclusion of REITs makes sense since those companies have to pay out at least 90% of their income in the form of dividends each year. Those mandatory and high payouts would mean that REITs could potentially dominate the fund's income sources. That would make the ETF less useful as an option for investors looking for standard-type companies with great dividend growth histories.

The other exclusion -- the one that keeps out the highest-yielding companies -- might seem a bit strange at first. It makes sense, though, when you realize that particularly high yields are often a sign that a stock is a "yield trap." Yield traps are companies that have temptingly high yields based on their past dividend payments, but also are at high risk of future dividend cuts. Eliminating the highest yielders helps keep many of those yield traps out of the Vanguard Dividend Appreciation ETF's portfolio.

Put it all together, and this ETF is worthy of consideration by investors looking for rising dividends from companies that have decent potential to keep the payout growth trend going.

Get started now

No matter where you'd like to get your dividends from, the reality is that you need to be invested in any dividend payer before its ex-dividend date, and hold onto the stock at least until that date, to get that period's payment from your investment. The calendar moves forward relentlessly, putting that cash in the hands of those who own those dividend-paying stocks at the right times.

As a result, if you want to get directly rewarded in cold, hard cash for the risks you take by investing, today is a great day to seek out investments that can offer you those types of rewards. Once you start seeing some money come back your way, you'll likely appreciate seeing that cash roll in.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Chuck Saletta has positions in Microsoft. Eric Volkman has no position in any of the stocks mentioned. Jason Hall has positions in Mastercard, Visa, and Walgreens Boots Alliance. The Motley Fool has positions in and recommends Amazon, JPMorgan Chase, Mastercard, Microsoft, Vanguard Specialized Funds-Vanguard Dividend Appreciation ETF, Vanguard Specialized Funds-Vanguard Real Estate ETF, and Visa. The Motley Fool recommends UnitedHealth Group and recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.

I am an investment enthusiast with a deep understanding of dividend-focused exchange-traded funds (ETFs) and the dynamics of income generation through investments. My expertise stems from years of actively participating in the financial markets, analyzing various investment vehicles, and staying informed about market trends.

Now, let's delve into the concepts mentioned in the article:

  1. Dividends and Risk-Reward Trade-off: The article discusses how dividends provide a way for investors to be rewarded for the risks they take in investing without selling their shares. However, it emphasizes the inherent risk that comes with dividends, as companies may cut payments, impacting both expected income and capital.

  2. Dividend-Focused ETFs: To mitigate the risk associated with individual stocks, the article suggests considering dividend-focused ETFs. These funds don't eliminate the risk of dividend cuts but offer diversification to reduce the overall impact on a portfolio from the loss of any one dividend.

  3. Highlighted ETFs: Three dividend-focused ETFs are recommended in the article:

    • JPMorgan Equity Premium Income ETF (JEPI)
    • Vanguard Real Estate ETF (VNQ)
    • Vanguard Dividend Appreciation ETF (VIG)
  4. JPMorgan Equity Premium Income ETF (JEPI): Managed by JPMorgan Chase, this ETF focuses on generating income for shareholders. It utilizes specialized covered calls to enhance payouts. The article notes its high-yielding dividend, even though the yield has slightly decreased recently. The fund's portfolio includes diverse stocks, employing a sector-agnostic approach.

  5. Vanguard Real Estate ETF (VNQ): The article highlights the potential of real estate investments and recommends VNQ, which provides exposure to over 150 real estate investment trusts (REITs). It mentions the current dividend yield above 4% and the likelihood of long-term payout growth.

  6. Vanguard Dividend Appreciation ETF (VIG): This ETF tracks the S&P US Dividend Growers Index, focusing on U.S.-based companies with a history of annual dividend increases. The article emphasizes the importance of not just looking at the size of dividends but also considering how well they are covered and the potential for future growth.

  7. Considerations for Dividend-Focused Investors: The article advises investors to consider factors beyond the size of dividends, such as coverage and the company's ability to increase dividends over time. It excludes REITs from the Vanguard Dividend Appreciation ETF to avoid dominance by high-payout sources.

  8. Ex-Dividend Date: The article reminds readers that to receive dividends, investors need to be invested before a stock's ex-dividend date and hold onto the stock until that date.

In summary, the article provides insights into the risk-reward trade-off of dividends, recommends specific dividend-focused ETFs, and emphasizes factors to consider for dividend-focused investors.

3 Dividend ETFs I Want to Own in 2024 | The Motley Fool (2024)


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