The 4 Best Indexes for Dividends

Dividend investing remains one of the best ways to accumulate wealth over the long term in an investing world where you can pick from dozens of different strategies and methodologies for generating returns. Companies that pay regular dividends often generate enough income and cash flow to share these profits regularly with investors.

Key Takeaways

• Dividend investing provides a steady stream of income, helping to weather any short-term fluctuations in the market.
• Dividend mutual funds and exchange-traded funds (ETFs) are plentiful but many are benchmarked to indexes that aim to achieve very different objectives.
• Dow Jones U.S. Select Dividend Index and S&P Global Dividends Opportunity Index are two of the top indices.
• Dividends are often recognized as coming from large and well-established companies.

Understanding Dividends

High-growth stocks such as Netflix (NFLX) and Amazon (AMZN) get a lot of attention but dividends still generate a sizable part of an investment’s total return. They provide a regular stream of income that should continue despite any short-term fluctuations in the market.

Dividends are often recognized as coming from large and more well-established companies but any company that has the cash available on its balance sheet can pay them.

Young or fast-growing companies tend to take any available cash they have and reinvest it back into their businesses to fuel further growth. More mature or conservative companies that are no longer in growth phases often take much of their excess cash flow and give it to shareholders in the form of dividends.

Important

Retirement investors like to target dividend-paying companies because of their typically below-average risk profiles and because the dividends provide steady flows of income.

Not all dividend-oriented investments are the same, however. Dividend-focused mutual funds and exchange-traded funds (ETFs) are plentiful but many are benchmarked to indexes that aim to achieve very different objectives.

Dow Jones U.S. Select Dividend Index

The Dow Jones U.S. Select Dividend Index was established in 2003. It looks to target 100 dividend-paying stocks that are screened for factors including the dividend growth rate, the dividend payout ratio, and the trading volume. The components are then weighted by the dividend yield.

This index is heavily weighted toward historically higher-yield sectors such as utilities which have 29.3% of the index’s assets as of Sept. 30, 2024 and consumer goods with 12.3% of the assets. The top holdings include Altria (MO), AT&T (T), and Verizon Communications (VZ).

S&P 500 Dividend Aristocrats Index

Dividend aristocrats are stocks of companies that have raised their dividends for at least 25 consecutive years. Building a dividend portfolio composed of aristocrats has become a popular investing strategy among income seekers because it generally provides predictable income along with regular increases.

The S&P 500 Dividend Aristocrats Index is an equal-weighted index that typically contains at least 40 names from the S&P 500 that meet the definition of dividend aristocrat. Stanley Black & Decker (SWK), Clorox (CLX), and McDonald’s Corp. (MCD) are among the index’s top holdings as of Sept. 30, 2024.

NASDAQ U.S. Dividend Achievers Select Index

The definition of “dividend achiever” is slightly different from that of “dividend aristocrat.” Achievers only require at least a 10-year history of raising dividends rather than 25. The universe of investment possibilities for the NASDAQ U.S. Dividend Achievers Select Index is therefore much larger.

This index has been around since 2000. It typically consists of over 300 large-cap domestic names from a broad range of industries and sectors. Microsoft, Walmart, and Visa are at the top of the index’s holding list.

S&P Global Dividends Opportunity Index

Dividend opportunities exist around the world. The S&P Global Dividends Opportunity Index seeks to encompass roughly 100 high-yielding stocks that meet the criteria of demonstrating profitability, earnings per share (EPS) growth, and liquidity.

Risk-averse investors should be aware of the composition of this index. Only 34.9% of assets within this index come from the U.S. as of Sept. 30, 2024. The index’s mandate also states that stocks from developed and emerging markets can qualify, making it riskier than the average dividend index.

What Is a Dividend Payout Ratio?

The payout ratio is the percentage of earnings that a company pays out to shareholders in dividends. Some companies calculate the percentage of total earnings. Others base it on cash flow.

What Is an Equal-Weighted Index?

An equal-weighted index is made up of publicly traded companies that effectively invest in each other in equal portions. Each company’s stock therefore equally impacts the value of the index.

Do Dividend Stocks Come With Voting Rights?

It depends on whether they’re preferred or common shares. Preferred shares generally don’t carry voting rights. Common shares usually provide a vote per share held regarding major corporate actions.

The Bottom Line

Dividend investing tends to be a long-term strategy for those who aren’t particularly risk-tolerant or whose goal is to set up a steady stream of income in their retirement years. Not all companies pay dividends. Young companies tend to reinvest extra capital into their growth models. More mature companies are generally more willing to share with their stockholders. These indexes might provide some options that meet your goals.

Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal.