The Power Of Dividends: A Diversified 5-ETF Portfolio For All Investors

This portfolio is perfect for investors of all sophistication levels and covers dividend growth, dividend quality and high yield.

If you're a dividend investor who doesn't necessarily want to spend hours researching individual stocks, dividend ETFs may be perfect for you. There are roughly 150 different funds to choose from currently covering virtually every strategy, theme and region you can think of. It's truly a great marketplace for people who just want to sit and forget their portfolios!

You can actually build a complete dividend portfolio with just a few ETFs. I often talk about the three pillars of dividend investing - dividend growth, dividend quality and high yield. If your portfolio is focused around just one or two of these pillars, you could be missing out on an important market or leave some potential return on the table. Hit all three of these pillars and you've got most corners of the market covered!

If you look around through the dividend ETF universe, I think you can build a well-rounded dividend portfolio with just five funds. Yes, you could go nuts if you want and add international funds or actively-managed funds or funds that target a specific niche market, but let's keep it simple. A lot of times, keeping things less complex is better.

For the purposes of this exercise, our construction will look like this.

• Total Dividend ETF

• Dividend Growth ETF

• Dividend Quality ETF

• High Dividend Yield ETF

• Multi-Strategy Dividend ETF

By approaching it from this angle, we get some broad dividend coverage as our core, but get to target the best ETFs within the three pillars to enhance the portfolio's risk/reward profile. We'll finish it off with an ETF that uses a multi-tiered selection process to give us the best of all worlds. In total, you end up with one of the most well-rounded dividend ETF portfolios available.

WisdomTree U.S. Total Dividend ETF (DTD)

This is our core dividend stock ETF position. This fund targets U.S. companies that pay regular cash dividends and meet other liquidity and capitalization requirements. The index is dividend weighted to reflect the proportionate share of the aggregate cash dividends each company is projected to pay in the coming year.

In my opinion, DTD is an underappreciated gem. It's only got $1 billion in assets, which makes it tiny in comparison to some of the other ETFs I'll mention shortly, but I think it offers something that investors could really use. If you don't want to try to time whether dividend growth is in favor or high yielders are in favor, why not just buy the whole universe and not worry about it? Almost every ETF tries to target a specific niche, theme or market. It's nice that investors have an option that makes it simple. The expense ratio isn't great, but it's reasonable enough to not be a handicap.

Alternative: WisdomTree U.S. Large Cap Dividend ETF (DLN)

Vanguard Dividend Appreciation ETF (VIG)

This is our dividend growth ETF option. VIG tracks a market-cap-weighted index of U.S. companies that have increased their annual dividends for 10 or more consecutive years.

VIG is one of the largest & most popular ETFs in the entire marketplace and its simple strategy makes it ideal for investors who want to add long-term dividend growers to their portfolio without any frills or surprises. Why choose VIG instead of the ProShares S&P 500 Dividend Aristocrasts ETF (NOBL), which targets companies with 25+ year dividend growth histories? VIG's more lax screen allows for more a little more growth pop in the portfolio. You can find names, such as Apple and Microsoft, in VIG and I like adding a little zest to an otherwise more defensive portfolio overall. It's a personal preference for me, but both work well.

Alternative: ProShares S&P 500 Dividend Aristocrats ETF (NOBL)

FlexShares Quality Dividend Index ETF (QDF)

This is our dividend quality ETF option. This fund is designed to provide exposure to a high-quality, income-oriented universe of U.S. stocks with an emphasis on long-term capital growth and a targeted overall beta of 1. Companies included in the index are selected based on expected dividend payment and fundamental factors such as profitability, management expertise, and cash flow.

I've always liked QDF's selection strategy. Its focuses on positive fundamental metrics and high yields, but then optimizes the portfolio to expose shareholders to only market-average levels of risk. That makes it a great add-on to an S&P 500 or total market index ETF. It shouldn't (in theory) add any additional risk exposure, but gives you a higher quality factor in your portfolio. There's also the FlexShares Quality Dividend Dynamic Index ETF (QDYN) if you want a beta of 1-1.5 or the FlexShares Quality Dividend Defensive Index ETF (QDEF) if you want a beta of 0.5-1.

Alternative: WisdomTree U.S. Quality Dividend Growth ETF (DGRW)

iShares Core High Dividend ETF (HDV)

This is our high yield ETF option. This fund provides access to 75 dividend-paying domestic stocks that have been screened for financial health by looking at a pair of Morningstar measures, one for "economic moat" and one for "distance to default".

To be fair, HDV doesn't deliver pure high yield exposure. That would be the SPDR S&P 500 High Dividend ETF (SPYD), which screens only for yield. The problem with targeting pure yield is you have the potential to include some bad apples - those with artificially high yields due to share price declines or those at risk of a dividend cut. I don't think HDV's quality screen is necessarily very robust, but it should do enough to weed out the outliers.

Alternative: SPDR S&P 500 High Dividend ETF (SPYD)

Schwab U.S. Dividend Equity ETF (SCHD)

This is our multi-strategy dividend ETF option. This fund measures the performance of high dividend yielding stocks issued by U.S. companies that have a record of consistently paying dividends and are selected for fundamental strength relative to their peers based on financial ratios. Eligible stocks must have sustained at least 10 consecutive years of dividend payments and are then selected by evaluating the highest dividend yielding stocks based on four fundamentals-based characteristics — cash flow to total debt, return on equity, dividend yield and 5-year dividend growth rate.

You know I had to include this ETF! It's simply my favorite dividend ETF and the one that does the best job of targeting dividend growth, dividend quality and high yield all in one package! If you were to hold just one dividend ETF in your portfolio, this would be it for me, but it also makes for a perfect complement to a broader dividend portfolio as well. Or pretty much any portfolio!

Alternative: iShares Select Dividend ETF (DVY)

How you choose to weight these five ETFs is entirely a personal choice. Splitting it equally and allocating 20% to each is probably the easiest way to do it and certainly makes sense. If you want it to weight like many investors weight their entire portfolio - giving a larger allocation to the core S&P 500 or total market ETF position - you could consider something like 40-50% to DTD and the remainder getting split among the other four ETFs. Overall, these ETFs are pretty highly correlated, so I don't think you'll see a significant difference in the risk/return profile if you adjust the percentages.

Any way you want to divvy it up, this 5 ETF portfolio would be a great start to long-term dividend investing!