How do you find these dividend stocks with the highest yields, that are likely to keep paying them? Dividend Yield ETFs have gained popularity among investors who seek a consistent stream of income from their investments. These ETFs invest in companies that have a history of paying dividends and are known for their higher than average dividend yields.
While these ETFs may not offer the potential for high capital appreciation, they can be a good choice for investors who are looking for a steady income stream or seeking to diversify their portfolio. In this context, we will explore some of the best dividend yield ETFs available on popular investment platforms like Fidelityand Lightyear.
You will also want to find inflation beating dividend stocks with a strong track record. Even when times get tough, you want to know your dividend stocks will continue to pay-out. This article will explain how you can find high dividend yield stocks, with a more than decent track record.
Disclaimer: This is not financial advice and you are responsible for your own investment decisions. When investing capital is at risk. This article may contain affiliate links.
What Is Dividend Yield Stock?
Dividend yield is a financial ratio that shows the amount a company pays out in dividends annually relative to its stock price. The yield changes relative to the stock price, so it can be elevated when the stock price declines. Mature companies usually pay the highest dividend yields. Consumer non-cyclical stocks that market staple items or utilities are examples of sectors that pay the highest average yield.
Real estate investment trusts (REITs), master limited partnerships (MLPs), and business development companies (BDCs) are other companies that typically have high dividend yields. They distribute the majority of their income to shareholders to avoid paying taxes on profits. However, shareholders must pay taxes on the dividend payments as ordinary income. They do not qualify for capital gains tax treatment.
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How To Buy High Dividend Yield With Stocks
You can buy high dividend yield stocks with commission free platforms such as Lightyear. I’d say there are at least six steps of due diligence needed to invest in high dividend stocks.
Research dividend-paying stocks: Start by researching companies that have a history of paying high dividends. You can look for companies in industries such as utilities, real estate, and telecommunications, as they often pay higher dividends than other sectors.
Look for consistent dividend payments: Once you have a list of potential stocks, look for those that have a consistent history of paying dividends. This will help you identify companies that are committed to paying dividends over the long term.
Evaluate the dividend yield: When evaluating potential stocks, pay close attention to the dividend yield. This is the percentage of the stock’s current price that the company pays out in dividends annually. A high dividend yield is generally considered to be anything above 4%, but it’s important to remember that a high yield may not always be sustainable.
Consider the company’s financial health: Dividend pay-out depends on key factors such as such as revenue growth, earnings growth, debt levels, and cash flow. This can indicate if a company will sustain its dividend payments. A companies strategic may need capital to fund this, which can also impact on dividend policy.
Diversify your portfolio: Investing giant Vanguard says “dividends can play a crucial role in driving long-term equity returns”. Diversifying your portfolio across multiple dividend-paying stocks can make your equity allocations more robust. For example, dividend exposure can be used to inflation-proof your portfolio. This is because dividend stocks have a long-run ability to beat inflation (see below chart).
Monitor your investments: Once you’ve invested in dividend-paying stocks, it’s important to monitor your investments regularly. Keep an eye on the company’s financial health, as well as any changes to the dividend payments, to ensure that your investment remains a good choice over time.
Source: Robert J. Shiller, with stock market data used in “Irrational Exuberance” Princeton University Press, 2000, 2005, 2015, Vanguard. Data from 30 September 1922 to 30 October 2022. Dividends per share are for the S&P 500 index. Inflation = US Urban Consumer Index
How To Invest In A High Dividend Yield ETF
There is a simpler way to invest in high dividend yield stocks. You can buy a high dividend yield ETF. Investors who are looking for a passive way to generate a high dividend yield may want to consider investing in high dividend ETFs. These ETFs are designed to track a basket of high dividend yielding stocks. This provides investors with exposure to a diversified portfolio of companies that pay-out dividends
High dividend ETFs offer several advantages over investing in individual high dividend stocks. For one, they offer instant diversification. They invest in multiple companies across various sectors, which helps to reduce the risk of loss due to poor performance from any one company. High dividend ETFs also tend to have lower expense ratios than actively managed mutual funds. This makes them a more cost-effective way to invest in dividend-paying stocks.
One of the most popular high dividend ETFs is the FTSE All-World High Dividend Yield UCITS ETF (VHYL). This ETF invests in large-cap stocks that pay above-average dividends and has an expense ratio of just 0.29%. Another popular option is the iShares UK Dividend UCITS ETF GBP, which invests in 50 U.K. companies that have a history of consistently paying high dividends.
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High Dividend Stocks vs High Dividend ETFs
Both high dividend stocks and high dividend ETFs have their advantages and disadvantages. Which strategy is better depends on your individual investment goals and risk tolerance.
High dividend stocks can offer potentially higher returns than ETFs if the stock’s price increases along with dividend pay-outs. You might have the skill to pick an undervalued stock, which has a sustainable high dividend yield. However, individual stocks also come with more risk as their price can be impacted by company-specific factors such as management changes, regulatory issues, or lawsuits.
What Are The Risks Of A High Dividend Yield ETF?
High dividend ETFs can carry some risks. For example, these funds invest in stocks that pay high dividends. Just like any other stock, these companies are subject to market forces such as interest rate rises. If a company experiences a downturn in its market performance, there is always a chance it will reduce the amount of its dividend or eliminate its dividend entirely.
Additionally, some high dividend ETFs may be concentrated in a particular sector, which can increase the risk of losses if that sector experiences a downturn. It is always worth considering dividend yield stocks within the context of a balanced portfolio. You may also wish to consider other types of assets such as government and corporate bonds.
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The Advantages Of High Dividend ETFs
High dividend ETFs offer a diversified portfolio of dividend-paying stocks, which can help reduce the risk of individual stock volatility. ETFs also offer the convenience of being able to invest in a broad market sector with a single investment. Another advantage of investing in high dividend ETFs is that they typically have lower expense ratios compared to actively managed high dividend mutual funds. This can help reduce the overall cost of investing and increase returns over time.
Ultimately, whether to invest in high dividend stocks or high dividend ETFs depends on your investment goals and risk tolerance. If you prefer to take on more risk in exchange for potentially higher returns, high dividend stocks may be a better option for you. But if you prefer a more diversified approach with lower risk, high dividend ETFs may be a better choice.
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What Are The Best Dividend ETFs?
When it comes to dividend ETFs, there are many good options. This includes ETFs have a track record of consistent dividend pay-outs, and they invest in companies that have a history of increasing their dividend payments over time. There are also ETF such which aim to reduce the amount of volatility whilst producing a consistent dividend.
For example, the Invesco S&P 500 High Dividend Low Volatility ETF (SPHD). is a high dividend yield ETF that seeks to track the investment results of the S&P 500 Low Volatility High Dividend Index. This index is designed to provide exposure to 50 securities from the S&P 500 Index that have historically provided high dividend yields and low volatility.
You can also invest in ETFs that offer a greater level of diversification whilst maintaining a consistent dividend. You also have the option to increase the quality of the dividend stocks you hold. Many ETFs now have quality screening incorporated into their methodology. This allows you to buy dividend stocks that are filtered to ESG criteria.
There are actually 8 dividend yield ETFs that make my personal shortlist. Find out of the SPHD makes the cut!
How To Find High Dividend Stocks
A high dividend yield can also indicate many things. Not all of them are good. For example, a falling stock prices can increase dividend yield percentage. Many companies go into debt by overspending on their dividend. As such, these companies may then cut their unsustainable dividends. Investing in dividend stocks that are financially healthy and will continue to pay dividends is crucial.
If you’re looking to maintain a steady dividend yield then you need to find companies that are unlikely to cut them. In other words, what companies have historically paid a consistent dividend. There are are ETFs that include stocks that have grown their dividend over the last 10 or even 20 years!
Want to know the dividend ETFs with Dividend Yields over over 8% and fees as low as 0.35%? Check out the 8 dividend yield ETFs that make my shortlist.
When investing capital is at risk.
