Top 3 U.S. Dividend ETFs For Your Passive Income Portfolio (Part 1)
- John Macy
- Jul 15
- 8 min read
Updated: Jul 17
Written by John Macy, Financial Coach, MBA, Retirement Income Certified Professional® (RICP)
Introduction
For many retirees and those approaching retirement, generating reliable income from investments is one of the biggest financial challenges. Dividend ETFs have become increasingly popular because they can provide steady cash flow while still offering long-term growth potential. But with dozens of dividend funds available, choosing the right one isn't as simple as picking the highest yield.
While generating reliable dividend income can be accomplished by purchasing a portfolio of individual high-quality dividend growth stocks, many people choose to use a couple of diversified ETFs rather than selecting and purchasing 30-50 individual stocks.
Building a portfolio for long-term cash flow requires moving beyond simply looking for the highest current yield. Successful dividend investing balances current income with long-term dividend growth, total return, downside risk, and risk-adjusted performance.
This is Part 1 of a two-part series on the top dividend ETFs. This article will focus on U.S. dividend ETFs while Part 2 will focus on international dividend ETFs. Part 3 will focus on creating a global dividend ETF portfolio from the best of these dividend ETFs.
No single dividend ETF is "best" for everyone. Investors have different goals, risk tolerances, tax situations, and income needs. The purpose of this comparison is not to identify one universal winner, but rather to narrow the field to several outstanding candidates worthy of further research.
To help guide your research, this guide analyzes ten domestic dividend ETFs to determine which deserve further research for possible inclusion in your portfolio. These 10 ETFs are the following: DGRO, DVY, HDV, NOBL, RDIV, SCHD, SDY, SPYD, VIG, and VYM. The framework we used to evaluate the funds uses a multi-variable composite score matrix calculated using data through mid-2026.
Focusing on Dividend Yield Alone Can Be Dangerous
Many investors focus too much attention on obtaining a high dividend yield and insufficient emphasis on other important factors. Why is a focus on high dividend yield dangerous?
A struggling company tends to have a falling stock price which artificially increases its dividend yield.
Unsustainable payout ratios often precede dividend cuts.
Dividend growth is often a better indicator of business quality.
When a business pays an unsustainable dividend it almost inevitably results in two outcomes very detrimental to the financial health of an investor: (1) the dividend is cut; and (2) the stock price drops substantially.
Our goal isn't simply to own companies that pay high dividends today. It's to own financially healthy companies that can continue growing those dividends for many years. For this reason, our composite scores focus on a broader set of very important issues and factors. These are described in the next section.
Our Analytical Scoring Methodology
To create a more objective comparison, we ranked each ETF using a custom weighted scoring model based on the factors professional portfolio managers commonly evaluate.
High-Weight Factors (60% total weight):
3-Year Average Dividend Yield,
3-Year Sharpe Ratio, and
Downside Price Volatility.
Standard-Weight Factors (40% total weight):
Dividend CAGR (3, 5, and 10-year),
Total Return,
Sector/Industry Diversification Level,
Beta (\(\beta \)), and
Expense Ratio.
A fund holding 400 stocks isn't necessarily well diversified if 35% of the portfolio is concentrated in technology. Our diversification score considers not only the number of holdings but also how evenly assets are spread across sectors and industries. Read our complete guide to portfolio diversification here and here.)
Because this analysis is intended primarily for retirees and near-retirees, we intentionally placed greater emphasis on current dividend yield, downside volatility, and risk-adjusted returns than on factors such as expense ratio or beta. Investors still accumulating wealth might reasonably choose different weights that emphasize long-term total return or dividend growth.
Because each metric is measured on a different scale (percentages, ratios, expense ratios, etc.), all variables were normalized before applying the weighting system.
The Domestic Dividend ETF Master Matrix
The data below presents a multi-factor comparison of the top 10 domestic dividend funds, sorted by their composite scoring tier. (Note: HDM has been replaced by its functional index equivalent, HDV, to maintain data uniformity.)
What the Data Reveals
Most of the ETFs analyzed have low expense ratios (0.08% or below), although a couple (NOBL, RDIV, and SDY) have expense ratios of 0.35% or higher. Low expense ratios are highly preferred to improve both dividend yield and total return.
While SPYD has a 3-year average dividend yield of 4.35%, the other ETFs have yields of 3.7% or below. In fact, five of the ETFs have yields below 3.0%, and one of the ETFs has a yield below 2.0% in spite of its dividend orientation. This is largely a function of current high stock valuations in the U.S. stock market.
Beta measures how sensitive a fund has historically been to movements in the overall stock market. A lower beta generally suggests smaller price swings during broad market declines, although it does not guarantee downside protection. Since this article is oriented towards pre-retirees and retirees, what we are looking for here is the greater diversification and lower volatility. Those with high Betas tend to be more volatile, while those with lower Betas tend to give the investor a smoother ride. In this universe of dividend ETFs, HDV has the lowest Beta, while RDIV has the highest Beta with SPYD not far behind.
The Sharpe ratio is a measure of the degree to which an asset provides returns commensurate with the risks that it takes. Higher Sharpe ratios are generally better than lower Sharpe ratios. Among these 10 ETFs, SCHD and DGRO have the highest Sharpe ratios and SPYD has the lowest Sharpe ratio.
Key Takeaways at a Glance
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Best U.S. Dividend ETFs: Individual Reviews
SCHD (Schwab U.S. Dividend Equity ETF)
Earned the highest composite score due to its high dividend yield, high dividend CAGR, high total return, and high Sharpe ratio. By tracking the Dow Jones U.S. Dividend 100 Index, SCHD applies a strict formulaic screening and stock selection process. SCHD's rules-based approach emphasizes companies with strong cash flow, healthy balance sheets, strong Return on Equity (ROE), and consistent dividend growth histories. This quality screen has historically helped the fund avoid many of the classic dividend traps associated with chasing the highest yields. SCHD may not be ideal for investors seeking maximum exposure to high-growth technology companies or those who prioritize the highest possible current yield over dividend quality.
DGRO (iShares Core Dividend Growth ETF)
Places second on the composite score, with a lower dividend yield but good dividend CAGR, high total return, and high Sharpe ratio. DGRO focuses heavily on the structural sustainability of dividend growth. DGRO requires a 5-year track record of consecutive payment increases and filters out any company with a payout ratio over 75%. DGRO often provides greater exposure to technology companies (e.g., Microsoft and Apple) than many traditional dividend ETFs, helping it participate more fully in long-term earnings growth. This mix results in premium total returns and lower volatility. This also makes DGRO an excellent complement to other dividend ETFs that tend to focus more on quality "old economy" companies. DGRO may not be the best choice for investors who need maximum income today, as its yield is typically lower than that of traditional high-dividend funds.
VYM (Vanguard High Dividend Yield ETF)
Placed third on the composite score, with middling dividend yield, dividend CAGR, total return, and Sharpe ratio but ultra low expense ratio. VYM tracks the FTSE High Dividend Yield Index, providing investors with broad diversification. VYM passes its holdings through a single pure-yield filter rather than complex financial ratio hurdles. Holding over 450 stocks, it systematically caps individual company risk. Because VYM owns hundreds of companies, individual dividend cuts have relatively little impact on the overall portfolio's income stream. Its ultra-low 0.04% expense ratio makes it an excellent choice for a low-cost, hands-off income core. VYM may not appeal to investors seeking the fastest dividend growth or a concentrated portfolio of only the highest-quality dividend growers.
DVY, SPYD, and RDIV (The Tactical Yield Group)
These funds represent the high-yield, deep-value segment of the market. SPYD offers the highest current yield on the list (~4.35%) by selecting the top 80 yielders from the S&P 500, but it lacks strict corporate health screens. DVY tilts heavily toward mid-cap utilities and financials, offering strong dividend growth but at a higher beta (0.86). RDIV takes an alternative approach by weighting high-yielding stocks by corporate revenue rather than market cap, minimizing the influence of artificially inflated stock prices. These funds may appeal to investors seeking maximum current income, but their higher yields often come with greater concentration risk, slower dividend growth, or weaker long-term risk-adjusted returns.
Which Dividend ETF Is Right for You?
Different investors have different goals and priorities. There is probably no "one size fits all" best dividend ETF for every investor. Here is one way to think about which ETFs might be the best fit for you and your particular needs.
If you value... | ETF to research |
Highest overall balance | SCHD |
Strongest dividend growth | DGRO |
Lowest cost | VYM |
Highest current income | SPYD |
Dividend Aristocrats | NOBL |
Utilities/value tilt | DVY |
Equal weighting | SPYD |
Broad diversification | VYM |
Conclusion: Top 3 Domestic ETFs for Further Research
Rather than highlighting a single fund as the optimal choice, your research should look closely at how these distinct strategies align with your personal income objectives and timeline. Below are three core funds that provide excellent starting points for deeper portfolio research:
SCHD (Schwab U.S. Dividend Equity): Best for investors seeking a balanced combination of current cash flow and high dividend growth. It is well-suited for long-term compounding horizons.
DGRO (iShares Core Dividend Growth): Ideal for total return investors who prioritize long-term dividend growth and total return over high immediate starting yields.
VYM (Vanguard High Dividend Yield): A strong match for conservative income investors seeking simplicity, low costs and broad diversification across hundreds of large-cap domestic value equities.
Each ETF excels in a different way, and the "best" choice depends on an investor's goals rather than on a single performance metric. In many cases, investors may find that combining two complementary dividend ETFs provides better diversification than relying on a single fund. For example, pairing a quality-focused fund such as SCHD with a dividend-growth fund such as DGRO can provide exposure to different segments of the dividend-paying market.
Final Takeaways
Many investors assume they need to find the single "best" dividend ETF. In reality, combining two complementary dividend ETFs can often provide broader diversification and exposure to different dividend strategies than relying on a single fund.
Remember that dividend ETFs are just one component of a well-designed retirement portfolio. While they can provide attractive income and long-term dividend growth, they should generally be combined with other asset classes — such as bonds, Treasury Inflation-Protected Securities (TIPS), cash reserves, and international equities — to build a portfolio capable of generating sustainable retirement income across a wide range of market environments.
Finally, don't overlook taxes when selecting dividend ETFs. Most dividends paid by these funds qualify for the favorable long-term capital gains tax rates when held in a taxable account, but account location, state taxes, and (for international dividend ETFs) foreign withholding taxes can all affect your after-tax returns. We'll explore these issues in more detail in a future article.
Choosing a dividend ETF is only one piece of designing a retirement income portfolio. If you'd like personalized guidance building a diversified retirement portfolio that balances income, growth, taxes, and risk, I'd be happy to help. You can learn more about my retirement coaching services or schedule a complimentary introductory meeting at Flourishing Path Financial (www.flourishingpathfinancial.com/book-online).
Author: John Macy, MBA, RICP®
John Macy is a professional financial coach and the founder of FlourishingPath Financial Coaching. With over six years of experience as a financial coach, John helps pre-retirees and retirees design resilient portfolios and income streams for their next act. Read his full story here.
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