3 Dividend ETFs That Are Having a Great 2024

Bryan’s Armor: It was a great year for stocks, and dividend stocks have had some success. Dividend ETFs typically take one of two approaches: they target a high dividend yield or dividend growth. High-dividend-yield ETFs prioritize income, and the best strategies control for quality to avoid companies whose final dividends appear high because of deteriorating fundamentals and share prices. Dividend-growth ETFs focus on stable dividends, attracting stocks that have a long history of growing dividends.

The two approaches capture different signals from a company’s dividends. As a result, their risk/reward profiles diverge. A high dividend yield, as the name suggests, results in higher yields and lower growth. Dividend growth strategies tend to preserve successful, stable franchises, unlocking future growth at the cost of lower returns.

Investors can find success using both strategies. Today, I’ll share the best-performing dividend ETFs this year whose strategies combined high yield and dividend growth to take different paths to similar levels of success.

3 Dividend ETFs That Are Having a Great 2024

Fidelity High Dividend FDVV ETF Fund
Vanguard Dividend Appreciation ETF VIG
WisdomTree US Large Cap Dividend ETF DLN

First on my list is the Silver-rated Fidelity High Dividend ETF, ticker FDVV. It’s an unorthodox strategy that balances high yield with high quality. It did particularly well in 2024, outperforming the broader market and landing in the top 5% of large-value funds.

How did that happen? Well, yield drives this ETF’s stock selection, but it also considers the payout ratio and 12-month dividend growth. Adding these criteria highlights stocks with strong fundamentals that are likely to maintain their dividends.

The ETF attracts the best-rated stocks from each sector using these standards, which typically include a 5%-10% allocation to international companies. Several adjustments are made before the portfolio is finalized. First, the index reallocates 40 percentage points of the portfolio weight from six lower-yielding GICS sectors to five higher-yielding sectors to increase yields; second, international stocks are limited to 10% of the portfolio; and third, the index applies a moderate market-cap weighting scheme to those that make the final cut.

The resulting portfolio may have some oddities due to the index’s complicated rules, such as Nvidia NVDA topping the portfolio with a weighting of over 5% despite paying a quarterly dividend of exactly one cent per share. For the most part, though, this ETF looks like a traditional high-dividend strategy that leans toward unconventional sectors that provide larger, higher-quality franchises.

Second on my list is the Gold-rated Vanguard Dividend Appreciation ETF, ticker VIG. This ETF focuses on dividend growth rather than yield, which puts it in the Morningstar Large Blend category rather than a Large Value category like FDVV. That raised the bar for 2024, given its outperformance in the category year to date. VIG has performed near the top of the list of value-oriented dividend ETFs, but its returns are around the average in its category, albeit with lower volatility.

What Drives This ETF’s Consistent Performance? This ETF’s index is biased toward U.S. companies that have increased their dividend payouts for at least 10 consecutive years. It eliminates the highest-yielding names from this cohort to ensure financial stability and a higher likelihood of continued dividend payout increases in the future.

The index weights its holdings by their free float-adjusted market capitalization, which leverages the collective wisdom of the market and helps mitigate turnover and related trading costs. It also limits individual holdings to 4% of the portfolio to promote diversification.

The VIG portfolio consists of industry pillars with wide moats and high profitability, with Apple AAPL, Broadcom AVGO, Microsoft MSFT, JPMorgan JPM, and UnitedHealth Group UNH at the top of the portfolio. Stock selection based on long-term indicators results in a stable portfolio with little rotation.

Last on my list is the Silver-rated WisdomTree US LargeCap Dividend ETF, ticker DLN. This ETF has performed in the top 10% of large-value funds year-to-date because its index construction goes beyond yield alone.

The index attracts the 300 largest dividend stocks on the market by their projected cash dividends, then boosts those with the best combination of quality and momentum characteristics. Quality and momentum go a long way toward reducing risk and smoothing out results. They also tilt the portfolio away from traditional value stocks toward a more market-oriented mix of stocks.

Edge constraints help the portfolio avoid value traps. For example, stocks whose yields fall in the top 5% are excluded if their combined quality and momentum scores fall in the bottom half.

The target characteristics of this large-value ETF’s portfolio lands somewhere between large-value and large-blend portfolios in terms of sector weightings and risk factor exposure. That means companies like Nvidia show up, but with a lighter weight than the broad market indices.

We expect all three ETFs to maintain their track record of strong risk-adjusted performance over the long term.

Share your thoughts on these picks with me at X (@mstararmour) and visit our ETF page at morningstar.com/topics/ETFs.

Watch 3 Great ETFs for Turbulent Markets to learn more from Bryan Armour.