When it comes to investing, diversification can be an important step to take to avoid taking on undue risk. Traditionally, mutual funds have been an important strategy that people have taken to spread risk across different companies.
More recently, exchange traded funds, better known as ETFs, have become popular avenues. These funds are traded on major exchanges like the New York Stock Exchange and have greater liquidity than traditional mutual funds.
Those who are looking for income generation might choose to check into dividend ETFs. These funds look at companies that pay out dividends to their investors. These payments can then be used for paying ordinary bills.
They could also be used to buy more shares of the dividend ETF, which will lead to even more dividend income over time. When investing in ETFs, there are a few options.
Most people might not think of index funds when they think about dividend funds. However, index funds like Vanguard’s S&P 500 fund (VOO) and Total Stock Market Index fund (VTI) will still pass on the dividends that their constituent companies pay out to their investors.
While these funds might not pay out as much as dedicated dividend funds, those who buy them will still earn dividends.
High-yield Dividend Funds
Some dividend ETFs focus upon companies that pay out a higher dividend yield. If the S&P 500 pays out 2 percent as a whole, these funds might pay out a yield of around 4 percent. Those who are looking for income for retirement or to supplement their standards of living might choose to invest in a high-yield fund.
These funds have the benefit of a relatively high yield that can cause the dividend income snowball to grow more quickly as some serious compounding starts taking off nearly immediately.
ETFs that would fall into this category are Vanguard’s High Dividend Yield ETF and O’Shares FTSE US Quality Dividend ETF.
Dividend Growth ETFs
Funds that focus upon dividend growth do not focus on the current yield; they focus upon the amount that a dividend might be expected to grow over time. Rather than buying companies like AT&T that have only increased their dividends by 2 percent in recent years, these funds might focus on companies like Starbucks that are growing at a rate of 20 percent or more each year.
The initial yield on dividend growth funds will be lower, but investors can expect these payouts to grow over time at a rate that should exceed inflation.
Where many investors are concerned about capital gains, others are focused more upon the income that their investments can provide. For those in the latter category, a dividend aggressive growth fund can sometimes offer both capital appreciation and dividend income, which is the best of both worlds.
A mixture of both high-yield dividend funds and dividend growth options is a strategy that can give solid income in the near term and also provide income growth over time that can cut down the risk that inflation will erode the value of the dividend payouts.
Even if an investor is not focused entirely on income, a dividend ETF could still provide a solid level of diversification.