There are many different ways you can use dividends to build a portfolio, so investors looking to build a dividend portfolio have lots of options. That’s true even if you’re looking to simplify your investment life by using exchange-traded funds (ETFs). Here are three very different dividend ETFs that can each lay the foundation for a diversified-income portfolio.

1. Vanguard High Dividend Yield ETF

A lot of investors who focus on dividends are looking for yield in an effort to build a strong income stream to supplement Social Security in retirement. That’s completely understandable, and a good choice in the exchange-traded fund space is the Vanguard High Dividend Yield ETF (NYSEMKT: VYM), which tracks the FTSE High Dividend Yield index.

It isn’t a particularly complicated methodology. It basically takes the highest-yielding stocks from the index and then weights them by market cap — i.e., the fund invests more money in the larger companies than in the smaller companies.

Because the fund owns roughly 450 stocks, you’re getting a good amount of diversification. Sectorwise, financial stocks are the largest component of the fund at roughly 20% of assets, but that’s not a shocking overweight given the historical preference for high dividend yields that financial stocks have.

The fund’s expense ratio is a tiny 0.06%, so it’s very cheap to own. The biggest drawback is likely to be the dividend yield, which is around 3.1%. That’s not a huge figure on an absolute level but far larger than what you would get from an S&P 500 index ETF, which currently would net a yield of roughly 1.4%.

2. Vanguard Dividend Appreciation ETF

If you aren’t looking for a high yield, then you may be interested in stocks that have rewarded investors with dividend growth over time. Vanguard Dividend Appreciation ETF (NYSEMKT: VIG) offers a way to tap into that approach without having to buy individual stocks. The ETF tracks the S&P U.S. Dividend Growers Index.

The S&P U.S. Dividend Growers Index selects companies that have increased their dividends for at least 10 years, excluding real estate investment trusts (REITs). The highest-yielding 25% of the companies that pass the 10-year test are removed. The remaining stocks are weighted by market cap, so the largest companies make up more of the ETF than smaller ones.

By pulling out the highest-yielding companies the fund is, in effect, attempting to get rid of companies that might fall into the value arena (often typified by slow-growth companies or those that are working through a difficult financial period). Weighting by market cap is attempting to lean toward growth stocks, which will often be the largest companies. That, however, appears to skew the ETF toward lower-yielding stocks,noting the fund’s dividend yield is roughly 1.9% today.

The expense ratio is a modest 0.06%, but unlike Vanguard High Dividend Yield ETF, technology is the largest sector in Vanguard Dividend Appreciation ETF. Notably, the dividend per ETF share has grown in each of the past five years, so the fund has lived up to its name.

3. Roundhill S&P Dividend Monarchs ETF

Roundhill S&P Dividend Monarchs ETF (NYSEMKT: KNGS) is the new kid on the block — it just started trading on Nov. 3, 2023. At the time of this writing, it hadn’t yet paid its first dividend, but the underlying index’s yield is around 3.5%.

Unlike the two Vanguard options above, which both have tens of billions of dollars in assets in the ETFs, Roundhill S&P Dividend Monarchs ETF is still tiny, with just millions. This won’t be a great option for all investors.

That said, S&P Dividend Monarchs ETF might be of interest to investors who place a high value on dividend consistency. The ETF tracks the S&P Dividend Monarchs Index, which looks at companies that have increased their dividends for 50+ years.

Effectively, it buys Dividend Kings and weights them by yield, putting more assets into higher-yielding stocks. There are currently 36 holdings in the ETF. This ETF is more expensive than either of the Vanguard options above, with an expense ratio of 0.35%.

However, if you’re a fan of Dividend Kings stocks, it’s probably the most direct way to follow a Dividend Kings investment approach without buying individual companies. Although it’s new and small, it’s definitely an ETF you’ll want to keep an eye on, even if you wait for it to build a longer track record before you buy it.

Build the foundation, then explore

The key factor with all of these dividend-focused ETFs is that they can form the foundation of a broader income portfolio. That doesn’t just mean pairing them with bond ETFs. For instance, you could also look to add a covered-call-writing ETF like JPMorgan Equity Premium Income ETF (NYSEMKT: JEPI), which has a 9% yield but a far more complicated investment approach. You could also use an ETF that’s focused on a single sector you’d like to highlight, like REITs.

Essentially, the goal of buying ETFs like the Vanguard High Dividend Yield, Vanguard Dividend Appreciation, and Roundhill S&P Dividend Monarchs is to focus on the type of dividend stocks you prefer and, in one step, create a well-diversified portfolio that can be fine-tuned with other investments, including ETFs, mutual funds, or even individual stocks and bonds.

These ETFs can be powerful simplification tools that allow you to focus your time on things that will have the most impact on your life. That could be picking individual dividend stocks, higher-yielding but more complex ETFs, or even perfecting your golf swing, spending time with family, and catching up with old friends, if that’s what’s most important to you in retirement.

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These 3 Dividend ETFs Are a Retiree’s Best Friend was originally published by The Motley Fool

Source: finance.yahoo.com