If you’re getting a tax return, there are plenty of ways you can spend it. However, investing in a dividend ETF may be one of the best choices. The top dividend ETFs give you instant diversification to a broad swath of dividend-paying stocks, they pay you passive income on a periodic basis, and you can use these payments to build wealth over time.
Here are three of the top dividend ETFs that you can consider buying with your tax return. All three take different approaches, but what they have in common is that they all pay solid dividends, own an impressive collection of blue-chip companies, and have solid track records.
With an 11.75% yield and a monthly payout schedule, it’s hard to look past the JPMorgan Premium Income ETF when it comes to dividend ETFs.
JEPI invests in blue-chip U.S. dividend companies like Coca-Cola (NYSE:KO), Pepsi (NASDAQ:PEP), and AbbVie (NYSE:ABBV) and then invests up to 20% of its assets into equity-linked notes or ELNs. According to JEPI’s summary prospectus, the ELNs that JEPI invests in are “derivative instruments that are specifically designed to combine the economic characteristics of the S&P 500 Index and written call options in a single note form and are not traded on an exchange.”
This helps JEPI execute its strategy of capturing most of the returns of the S&P 500 while also exposing investors to less volatility than the index and providing monthly dividend payments. The one potential downside of this strategy is that it will likely cap some of JEPI’s potential upside in a bull market, so this isn’t really an investment to make if you are looking for growth or capital appreciation.
What is the Price Target for JEPI Stock?
The lack of capital appreciation potential can be seen in JEPI’s analyst forecast. Analysts rate it a Moderate Buy, and the average JEPI stock forecast implies 12.1% upside potential, which isn’t bad, but likely isn’t something to write home about. However, if dividend income and total returns are your goals, JEPI is a good starting point for a portfolio.
Investors can feel comfortable with JEPI’s portfolio of high-quality blue chip stocks. Below, you’ll find JEPI’s top holdings using TipRanks’ holdings screen. As you can see, there are the aforementioned consumer staples giants like Coca-Cola and Pepsi, plus the Hershey Company (NYSE:HSY), in addition to other well-known large-cap U.S. stocks like Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL), Mastercard (NYSE:MA), and Visa (NYSE:V).
For the most part, these stocks boast strong Smart Scores — 7 out of the top 10 holdings boast Smart Scores of 8 out of 10 or better, which is equivalent to an Outperform rating. The Smart Score is TipRanks’ proprietary quantitative stock scoring system that evaluates stocks on eight different market factors. The result is data-driven and does not involve any human intervention.
Moving on, JEPI has a reasonable enough expense ratio of 0.35%, and it lived up to its billing of mitigating volatility last year when the broader market suffered significant losses, with a loss of just 3.5% for 2022 on a total-return basis (which came after a strong 21.5% total return in 2021).
With JEPI’s strong track record thus far, monthly payout, massive dividend yield, and collection of blue-chip holdings, this is a great ETF to consider for a dividend portfolio, and it’s one that I own for these very reasons.
SCHD takes a different approach than JEPI, but the Schwab U.S. Dividend Equity ETF is another top dividend ETF for investors to consider this tax season. While its dividend yield of 3.6% isn’t nearly as high as JEPI’s, there’s a lot to like about SCHD, as it offers a good mix of income and potential capital appreciation.
SCHD is relatively well-diversified with 103 stocks, although, with a weighting of 41.6%, its top 10 positions also make up a greater proportion of the fund than JEPI’s top 10 (at 17.4%). Looking at SCHD’s top holdings, there are actually quite a few of the same names that you’ll find in JEPI’s fund as well, such as AbbVie, Pepsi, and Coca-Cola. Meanwhile, positions in Cisco (NASDAQ:CSCO), Texas Instruments (NASDAQ:TXN), and Broadcom (NASDAQ:AVGO) give SCHD a little bit more tech exposure than JEPI. Below are SCHD’s top 10 holdings, with Broadcom just missing the mark (at number 11 on the list).
Another thing I really like about SCHD is its minuscule expense ratio of just 0.06%. This means that in year one, an investor putting $10,000 into the fund would pay just $6 in management fees, and it’s hard to beat that type of investor-friendly approach.
SCHD also boasts an enviable long-term track record. Since its inception in 2011, this ETF has returned 13.8% per year on an annualized basis.
What is the Price Target for SCHD Stock?
The analyst community has a Hold rating on SCHD, and the average SCHD stock price target of $81.27 implies 10.4% upside potential. However, given the ETF’s long-term outperformance and its 3.6% yield, I believe they may be underselling SCHD at this point in time.
SCHD is one of the more popular ETFs out there, sporting just over $45 billion in assets under management. With its great track record of performance, solid dividend yield, and rock-bottom expense ratio, it’s easy to see why. Therefore, this is likely another great choice for dividend investors looking to put their tax returns to work.
Last but not least, the Vanguard International High Dividend Yield ETF is another great dividend ETF that investors can consider. VYMI boasts a 4.5% yield, which tops not only the average yield of the S&P 500 (1.7%) but also that of the 10-year Treasury note (3.4%). VYMI also offers relatively low fees, with an expense ratio of 0.22%.
Additionally, VYMI is extremely diversified. Not only does it hold 1,276 stocks, but its top 10 positions make up just 14.4% of assets.
Holdings like Shell and Royal Bank of Canada (NYSE:RY) enjoy ‘Perfect 10’ Smart Scores, while HSBC (NYSE:HSBC), BHP Group (NYSE:BHP), and Unilever (NYSE:UL) also have “Outperform” Smart Scores of 8 or better.
The benefit of VYMI is that it allows U.S. investors to gain exposure to international markets, giving them access to some of the growth in different markets beyond their home market. It also spreads out their risk, giving them more diversification.
While international markets have underperformed the U.S. in recent years, there could be some reversion to the mean going forward, meaning that it could be a good time to buy low on international equities. Similarly, while VYMI has lagged the return of the aforementioned U.S.-focused SCHD, for example, its annualized return of 7.6% since inception is still solid, and the situation could reverse at some point in the future.
As you can see below using TipRanks’ ETF comparison tool, things can change quickly, and VYMI is actually outperforming SCHD by a wide margin over the past six months.
Use Your Tax Return Wisely
In conclusion, consider using your tax return wisely this year by investing it to create long-term wealth. You can use these three ETFs to start or give a boost to your own dividend portfolio. Your future self will thank you, as dividends are the gifts that keep on giving.
I believe none of these ETFs look like a bad way to allocate your tax return, and you can even consider splitting it between two or three of them for even more diversification.