High dividend-paying ETFs sound like those mythical creatures from a fantasy world where you have two private jets that will whisk you away to your tropical island paradise. Gentle waterfalls flow to crystal clear pools and you watch stellar sunsets every evening. The air is fresh and balmy and there are no mosquitoes. Then you wake up.
Tropical islands aside, there are benefits to holding high dividend-paying ETFs in your diversified portfolio. Dividend ETFs tend to hold stocks that have historically paid dividends. However, as with all investments, just because an ETF has paid a dividend in the past, it doesn’t mean that it will always pay dividends.
Of course, ETFs are known for being diversified by nature. Many ETFs hold dozens of investments, and some even hold hundreds. These holdings are primarily spread across a sector, industry, or geographic location, leading to greater access to many companies. This level of diversification avoids putting too much emphasis on an individual investment. This way, no single company stock will make or break the ETF’s ability to produce income.
Understanding why passive investing and time commitments are key to profitable ETF investing
One significant benefit of some high dividend-paying ETFs is that they practice passive investing. Traditional ETFs are known for passive investing, which is a process that aims to maximize returns by selling and buying investments minimally. Fewer instances of buying or selling lead to fewer fees and less-costly expenses. Due to minimal trading, an investor practicing a passive style is often attempting to hold investments over long periods.
It is also important to realize that high dividend-paying ETFs can involve less of a time commitment because of their structure. Investing in individual stocks requires enough understanding and foresight on an investment before you make the purchase. Investors will look at the current trading statistics, past performances, and a slew of financial ratios before determining whether the investment would fit within a portfolio. ETF investors don’t put as much time into looking at all of the individual stocks that make up an ETF. Instead they look directly at the performance of the ETF.
Overall, passive investing is cheaper, less time-intensive, less complicated, and can lead to greater returns after taxes.
Should you consider investing in high dividend-paying ETFs?
Not all investment types fit every investor. Some investors have the time, understanding, and ability to focus solely on individual stock investments. As mentioned early, this is not the case for everyone, just as dividend ETFs are not everyone’s focus. For instance, a day trader interested primarily in short-term investments would not be an ideal candidate for investing in high dividend-paying ETFs, because they are more geared towards long-term strategies.
Here are the types of investors who are more apt to invest in dividend ETFs:
Investors targeting long-term goals: The best dividend ETFs can provide income to investors, and holding these investments over long periods will lead to lower fees and management expenses.
Older investors: Many of the top dividend ETFs can generate income. This is a benefit to older investors who need income and still want to maintain a diversified portfolio.
Investors who avoid risk: Since dividends cannot be faked, a dividend-paying stock provides proof of its success. Stocks with a history of paying dividends, and mainly dividend stocks that are also considered blue-chip stocks, will be less risky to invest in than many other unproven stocks. Dividend-paying stocks also tend to handle market setbacks better than other stocks, so these stocks are still likely to perform well in declining markets.
Are dividend ETFs part of your investing strategy? What has convinced you to include these investments in your diversified portfolio?