Become a Dividend Millionaire With These High-Yield ETFs

Investing for income is often viewed as something that only retired investors need to do. But history suggests that even young investors looking to build millionaire-sized nest eggs should focus on dividend-paying stocks. That said, a key component of the story is dividend growth.

Here’s why one of these three dividend-focused exchange-traded funds (ETFs) could be a perfect fit for you, regardless of where you are in your investment journey.

Why focus on dividends?

A dividend is a payment from a company to a shareholder, representing a tangible return on the investment that has been made. Some companies pay dividends, and some companies do not. But here’s an interesting fact: Between 1973 and 2024, dividend-paying stocks in the S&P 500 index (^GSPC +1.54%) produced an annualized total return of 9.2% compared to just 4.3% for S&P 500 stocks that didn’t pay dividends, according to Ned Davis Research and Hartford Funds.

That’s the proof that every investor, regardless of investment approach or age, should consider dividends as they look to invest. But the story doesn’t end there. Companies that increased their dividends regularly produced a total return of 10.2%. Companies that didn’t have a change in their dividend policy produced a total return of roughly 6.8%. So the sweet spot is, very clearly, dividend growth stocks.

There is one caveat here. Total return makes it easier to compare performance between investments. But total return assumes that dividends are reinvested. If you are looking to use your dividends to pay living expenses in retirement, your returns would come out differently. But that actually highlights the appeal dividends should have for younger investors, since reinvesting the dividend will provide such investors the biggest bang for the buck.

Three ETFs that buy dividend growth stocks

Starting with the most growth-oriented exchange-traded fund, investors focused on dividend growth will want to examine the Vanguard Dividend Appreciation ETF (VIG +0.75%). This ETF starts out by looking at all of the U.S. stocks that have increased their dividends for at least 10 years. It then eliminates the highest yielding 25% of the list. The remaining stocks are included in the ETF using a market cap weighting, so the largest companies have the biggest impact on performance. The expense ratio is a low 0.05%. Very clearly, this is a growth-oriented investment, and it is also a very diversified offering, with over 330 stocks in the portfolio. The one drawback here is the yield, which is a bit low at 1.6%. However, given the approach, that’s kind of what you would expect on the yield front.

With a dividend yield of roughly 3.8%, Schwab US Dividend Equity ETF (SCHD +0.19%) offers a good balance of yield and growth. It basically starts out with the same focus on companies that have increased dividends annually for at least a decade. But then it creates a composite score for each company that looks at cash flow to total debt, return on equity, dividend yield, and a company’s five-year dividend growth rate. Essentially, it is trying to identify companies that have the best combination of financial strength, business strength, yield, and dividend growth. The 100 companies with the highest composite scores get included in the ETF with a market cap weighting. The expense ratio is a very reasonable 0.06%.

If you are looking for a little more yield, you might want to consider the Invesco High Yield Equity Dividend Achievers ETF (PEY 0.30%). Like the other two ETFs above, it starts with companies that have increased their dividends for at least a decade. But then it chooses the 50 stocks from that grouping that have the highest dividend yields. The holdings in the ETF are weighted by yield, so the highest-yielding stocks have the biggest impact on performance. The expense ratio is a bit high at 0.54%, but the dividend yield is the most attractive at 4.6%.

One of these ETFs should fit your investment approach

If you are a growth-oriented investor, the Vanguard Dividend Appreciation ETF will be the right dividend growth option for you. If you are a high-yield investor, the Invesco High-Yield Equity Dividend Achievers ETF will probably be preferable. And if you want to cut the middle between yield and growth, then Schwab US Dividend Equity ETF is probably going to be the best call. What you shouldn’t do, however, is ignore dividend growth stocks because the data is very clear that dividend growth matters.