Generating income with investing in dividend paying Exchange Traded Funds (ETF)




One of my investing strategy is to buy dividend paying stocks and ETFs. Historically dividend paying companies are well established in their sectors and are more or less common household names such as Johnson & Johnson, Exxon, Pfizer etc. My prefererd method for investing in dividend paying stocks via ETF. As dividend oriented ETFs are often diversified across industries, hence better chance of reducing market volatility.

So lets see what is dividend and how they are calculated if its not clear to some of my audience.
Dividends are a portion of the profit paid back to the share holders in cash. Usually dividends are paid quarterly but few companies/ETF pay monthly as well. As a shareholder, we can take the cash dividend amounts or reinvest in the same stock/ETF. For an example, if I am a retiree in that case dividends can be a good source of monthly income. Or I don't need that money for now, easier is to reinvest which increases my portfolio by compounding.

Lets see briefly  to calculate dividend amount. For an example, if I have stock priced at $20 and pays 5% dividend yield, then I will be paid $1 ($20*0.05) in cash yearly. Usually each quarter I am expected to receive 25 cents in my brokerage account.

Today I will discuss some of my favorite ETFs for generating dividend incomes. While selecting ETF, I usually check these four criteria:

1. Dividend Yield ( A range around 2-4%, Usually dividend yield higher than that may not be sustained for long)

2. Expense ratio (I prefer not more than 0.4% annually. Expense ratio is the price we need to pay for ETF issuer. This does not apply if I buy individual stocks.)

3. Average Long term return ( In additional to dividend amount, I also make sure ETF or Stock price appreciating in value over time. I am usually try to buy if on average 8-10% annual increase over at  least last five years. There is no point in getting 4% dividend while stock/ETF price is going down year after years.)

4. Type of company/ies ( Each sector has difference tolerance for market turbulence. For example Financial companies are very sensitivity while consumer staple is quite indifferent. Usually good diversification among sectors is a safer strategy)

Some of my favorite dividend paying ETFs are here




Here are some of key performance of these three ETFs


Among these three, I have largest investment in VYM. It has 419 different dividend paying stocks in its portfolio which makes it highly diversified.  One thing note that SPHD pays monthly dividends, so this a good choice if I need monthly cash income in future. Currently I don't withdraw any paid dividends, just simply reinvest whatever cash comes. My goal is to create a large portfolio in long term so that dividend cash can be used for living expenses.

Disclaimer: This article shows my personal opinion. This is no way professional financial advice. You may seek professional advice or conduct own research before investment.




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