Written by Jonathan Weber for Sure Dividend
Income investors that want some inflation protection will likely not go with Treasuries or other fixed-income investments. With fixed income securities, income growth is not possible and inflation will cause buying power losses in real terms over time. Instead, equities can be a good choice for a combination of income generation and inflation protection.
Some income investors decide to choose among single or individual stocks, while others prefer to invest with a more diversified approach. One possibility for that is to invest in dividend ETFs.
1: Vanguard Real Estate ETF
Vanguard Real Estate ETF (VNQ) is an ETF that invests in publicly-traded REITs. REITs, in return, invest in real estate across many different classes, including apartments, office space, retail space, hotels, hospitals, and so on.
Real estate is generally offering solid income yields, and due to the “real asset” nature of the investment, real estate and REITs also tend to do well during times of high inflation. The underlying value of the properties increases, together with the rents that can be generated, while debt held by REITs is getting inflated away. REITs can thus be a compelling income investment choice in a high-inflation world, and VNQ offers broad-based exposure to REITs.
Vanguard Real Estate ETF’s core holdings are the largest quality REITs, such as Prologis (PLD), American Tower (AMT), or Realty Income (O). Many of these REITs have long dividend growth track records, which is beneficial for VNQ’s income growth potential.
VNQ is currently trading with a dividend yield of 3.5%, which is more than twice the broad market’s dividend yield. Over the last decade, the dividend has risen by around 50%, which makes for a solid mid-single digit annual income growth rate. VNQ also has a pretty low expense ratio of just 0.12% and is very liquid thanks to a large AuM base of more than $70 billion.
2: iShares Core High Dividend ETF
iShares Core High Dividend ETF (HDV) is another large-cap income ETF. Unlike VNQ, it does not have an industry focus. Instead, it invests in a diversified portfolio of equities across different industries and market capitalization ranges.
Its largest holdings are large-cap blue chips such as Exxon Mobil (XOM), Johnson & Johnson (JNJ), Verizon (VZ), or AbbVie (ABBV). These equities trade with high yields, which is why HDV is able to offer a compelling 3.3% dividend yield today — roughly twice as much as what one can get from the broad market right now.
HDV has increased its payout over time, which isn’t too surprising, as many of its largest holdings increase their dividends regularly. The 10-year dividend growth rate is 6%. If the ETF were to maintain that dividend growth rate, investors could reasonably expect to generate total returns in the 9% range going forward, between the aforementioned growth and the starting dividend yield of a little more than 3%.
iShares Core High Dividend ETF is managed by Blackrock, which is well-regarded and experienced. The total expense ratio is very low, at just 0.08%, meaning investors are not paying a lot for the management of the ETF, which is beneficial for their expected returns going forward.
3: ProShares S&P 500 Dividend Aristocrats ETF
ProShares S&P 500 Dividend Aristocrats ETF (NOBL) is an ETF that is not offering a yield as high as VNQ and HDV, but that has very high-quality holdings. The ETF only invests in Dividend Aristocrats, a group of companies that have managed to grow their dividends for at least 25 years in a row.
This means that the NOBL holdings have fared well during all kinds of macro crises, including the pandemic, the Great Recession, and the bursting of the dot.com bubble. Over decades, they have increased their dividends like clockwork, no matter what the macro environment looked like.
It is thus not surprising to see that NOBL has also increased its dividend very reliably. Over the last five years, the payout from the ETF has grown from $1.15 to $1.86, which equates to an annual dividend growth rate of 10%. ProShares S&P 500 Dividend Aristocrats ETF offers a dividend yield of 2.2%, which isn’t overly high. But its still considerably higher than the yield of the broad market, and with a 10% annual dividend growth rate, investors can expect very meaningful income growth over time. Compared to VNQ and HDV, NOBL is more of a dividend growth and quality choice rather than an ETF that maximizes current payouts.
NOBL has an above-average expense ratio versus the other ETFs in this article, at 0.35%. That’s a disadvantage, but still very compelling versus the expense ratios of most mutual funds, which are oftentimes in the 1%-2% range.
4: Energy Select Sector SPDR ETF
Energy Select Sector SPDR ETF (XLE) is an ETF that focuses on energy names such as oil and natural gas producers. This industry can be cyclical, but in the current environment, energy names are highly profitable due to the ongoing global energy crisis that has led to high prices for oil, natural gas, refined products, and so on.
The trailing dividend yield of the ETF is 4.0%, but investors can expect that the payout will increase going forward. Due to the very high profits that many oil and gas producers, refiners, and so on are generating right now, they are increasing their shareholder returns. That will lead to increasing flows towards XLE, which will, in turn, pay out higher dividends to the ETF’s owners. It can thus be expected that XLE’s dividends over the next year will be even higher than the already sizeable 4% dividend yield that investors get today.
XLE’s core holdings include names such as Exxon Mobil, Chevron, and ConocoPhillips. The company is thus primarily exposed to large-cap, diversified, reliable names in the energy space, reducing risks versus an approach of investing in small upstream pureplays.
XLE has a relatively low expense ratio of 0.11% and is managed by renowned State Street Global Advisors. The ETF’s large assets under management base of more than $37 billion means that this is a highly liquid ETF.