The BEST Dividend ETFs in 2025 (EU Investor)

So, you're thinking about dividend investing. You've read that dividend paying stocks are great because they pay you cash even when the market is down. Or maybe you've heard that you can buy one dividend ETF and get €1,000 per month in passive income.

But there are many ETFs to choose from. So, which ones are best? Well, what if I told you that some of the highest paying dividend ETFs are actually dangerous traps while the most profitable funds are easy to overlook?

Over my 17 years of professional investing experience, having invested hundreds of millions of euros from my clients, I've seen many new investors get dividend investing completely wrong. In this video, I will show you the most expensive mistakes investors make with dividend ETFs so that you can avoid them and protect your money. I will explain two better dividend strategies backed by evidence.

And finally, I'll show you how to find European alternatives for popular American dividend ETFs like SCHD and JPQ. First, let me show you how to avoid two of the most expensive dividend investing mistakes. To understand the first mistake, imagine this.

You are earning tons of dividends, but the value of your portfolio is going down. How is that possible? Well, let me tell you what happened to me last Christmas.

I ate way too much candy and cake, and I gained a lot of weight. So, I decided to stop eating sweets, but I still had cravings. So, I ate burgers and pizza instead.

And shockingly, I didn't lose any weight. Now, obviously to lose weight, it's not enough to just focus on one aspect of your diet. You have to watch your total calories.

And it's the same with dividend investing. There are two ways you can make money from stocks. One is dividends.

You buy the shares of the company. The company earns a profit and you get a slice of that profit in your bank account as a dividend. But the other way to make money is the stock price going up.

Now, to be profitable, you need both halves of the equation. You need to look at the total calories. Okay?

If your stock pays fantastic dividends, but the stock price goes down, that's no good. And here's how this plays out with dividend ETFs. Let's look at the top five ETFs for European investors that pay the highest dividends.

For this, we can go to just Eetf. com. For those of you who don't know, justf.

com is a great website for finding ETFs for European investors. And here I'm going to click on equity. So that means stock ETFs.

And under strategy, I will select dividend. So these are ETFs which focus on dividend paying stocks. And if I click on dividend yield that allows me to sort this list so that the highest dividend paying ETFs are at the top.

Okay. So here we see the Global X super dividend usage ETF where the dividend yield has been 11% over the past year which is crazy. If you invested €10,000 that means over a,000 euros in dividends would have landed in your account.

You have the isshares emerging markets dividend US ETF with a yield of 7. 8% and others. Okay, so the range of dividend yields is from 6 to 11% and that's attractive, right?

I mean anybody would love to put in some money and get 6 to 11% in dividends every year. But as we recall, dividends don't give you the full picture. Okay, we also need to look at the profitability.

So here we have a column that says 5 years in percent. So that gives you the total profit over the past 5 years from investing in the CTF combining both dividends and the price going up or down. Okay.

And this is the real indicator of what your result would have been if you invested. Seeing the dividend yield that is nice. It tells you how much cash you got in the form of dividends.

But in many cases maybe you got a lot of cash but the price stayed flat or it actually went down. Okay. And here we see that the total profit for these funds ranged from 17% over 5 years to 52% over 5 years.

This global XE ETF hasn't been around for 5 years. So you don't have a 5-year result. But if we look at a three-year result, we see that investors actually lost 4% over 3 years.

So your first impression looking at this fund might be, oh my gosh, it's paying 11% per year in dividends. That's amazing. Let me buy it.

But people who said that a few years ago, they actually ended up losing money because even though these stocks in the ETF, they were paying dividends, the price of the stocks kept going down. But what about these other funds? Is making 17% over 5 years or 50% over 5 years, is that a lot or is that a little?

Well, you would figure this out by looking at the total market, like what's the market average? So, for example, for American stocks, you might look at the S&P 500. And for the S&P 500, the 5-year result is 126% today.

So more than twice as high as for the highest of the dividend ETFs that we were looking at. Investing in the S&P 500 would have been much much much more profitable than buying these dividend ETFs. Now, of course, you can say it's not fair because American stocks have had a fantastic 5 years.

Technology companies have just exploded. Many people say there's an AI bubble. So it's kind of not a fair comparison.

But even if we look at global stocks, so that's Msei World, which invests in developed world stocks, the 5-year result was 102%. Twice as high as for the best dividend ETF that we just looked at. So clearly looking at just the dividend yield is not the best strategy because in many cases, you might be buying companies which have been paying a lot of dividends, but they have poor future growth prospects.

They might be in some kind of trouble and the the long-term result is not attractive. But let's take a look at which dividend ETFs European investors actually use the most. Okay, let's look at the biggest dividend ETFs for European investors.

Let me click on fund size. So, the most popular dividend ETF for European investors has been the Vanguard Footsie All World High Dividend Yield Usage ETF. Okay, with a dividend yield of 3.

3% and a 5-year result of 73%. Which is respectable even though it lags behind the Msei World result of 100%. So it makes sense that this would be a really popular ETF because it's an allworld ETF.

So this is a very very diversified way to invest in dividend stocks. Then we have the Spider S&P US Dividend Aristocrats ETF which has a 2% dividend yield and a 71% 5-year return which significantly lags the US market in general. Dividend aristocrats are stocks which have been increasing dividend payments year after year after year and a lot of investors really appreciate that consistency but as you can see this doesn't always mean that long-term profits are great.

Then we have this Eyesshare Stocks Global Select Dividend ETF which hasn't done so well. And then we have this Van Morning Star developed markets dividend leaders usage ETF which has performed very well and it has a high dividend yield as well. So this could look very attractive except when you look into the fund you see that almost 40% of the money is invested in the financial sector.

So the diversification level is maybe not so great. If something happens to financial stocks it can be at risk. And then finally we have this Fidelity US quality income usage ETF which has also performed quite well.

But we will come back to this ETF a bit later when I'll talk about one of the two smart dividend investing strategies that I really like. New investors sometimes imagine that dividend investing is this amazing reliable strategy. You're buying good profitable companies and getting a steady stream of income and growing your wealth over time.

But unfortunately, many high dividend paying stocks are just dividend traps with bad prospects for future growth. Others are simply profitable, reliable, boring companies like utilities which do earn a stable dividend for investors but which will never go to the moon. So the first mistake I see many investors make is simply focusing on the highest possible dividend yield and forgetting to look at the total profit picture.

Now let's look at the second mistake which might totally change the way you look at dividend investing. What if I told you that in the vast majority of European countries, you actually don't want dividends landing in your investment account. Imagine that your investment portfolio is a snowball rolling down the hill.

It starts out small, but as it rolls, it picks up more snow. Compound interest starts to work. Your profits get reinvested and make more profits, and the snowball keeps getting bigger and bigger.

But what if you stopped the snowball every 5 m to take away a little bit of snow? Your snowball wouldn't grow nearly as large, would it? Well, that is exactly what happens when your stock ETFs pay you dividends.

In most European countries, you immediately get taxed on those dividends. And after you pay the tax, you have less money left over to invest and compound over the years, and your final wealth in the future will be much less. This is why in most European countries, investors should prefer accumulating ETFs, which don't pay out any dividends, but reinvest them in the stock market instead.

Because with these accumulating ETFs, there is no cash landing in your account. In most countries, you don't need to pay dividend tax every year. Now there are a few countries such as Austria, Switzerland and the UK where you still get taxed every year but in most countries accumulating ETFs are more tax efficient.

So this is the second big mistake that I see a lot of new investors making. They buy distributing ETFs which pay a lot of dividends and then they end up paying a lot more tax than they should. Distributing ETFs can make some sense if you are already retired, if you want regular income in your account for spending, but if you're still young and investing for the future, it's usually not the best idea.

So, if that's true, why am I making this video about how to find the best dividend ETFs? Well, here's something counterintuitive. You can still use accumulating ETFs to invest in dividend paying stocks.

You just won't get the dividends in your account. They will stay inside the ETF. Many investors invest in dividend paying stocks not because of the cash flow but because they think these kinds of stocks are great investments.

And there is some evidence in favor of investing in financially strong companies which can afford to pay dividends. So a lot of research has been done on what is called factor investing where you use certain financial indicators like dividend yield to try and select stocks with better profit potential in the future. But when you read the actual research, here's what you find.

Dividend yield is associated with higher future profits, but it's not the best indicator for selecting profitable investments. Instead, there are a couple of better strategies that I would consider. These strategies have excellent profit potential and they often also have attractive dividend yields.

The first of these strategies is good old value investing. So you may know that value investors buy stocks for which the stock price seems to be low compared to the stock's financial fundamentals. Okay?

And because the stock price is relatively low, meaning you can buy these stocks relatively cheap, the dividend yield is usually relatively high. So, for example, if a company is paying €3 per share in dividends and the share price is €100, that's a 3% dividend yield. But if the share price is only €30, that's a 10% dividend yield.

So, cheaper stocks mean higher dividend yields on average. Over the past couple of decades, value investing has underperformed the market. Okay?

It has been a bad idea to invest in these cheap stocks. But that's because these fast growing technology stocks in the US market have been so wildly successful. If you look at long-term history, value investing has an excellent track record and it's quite a reasonable bet that the future could be similar.

So if you're interested in this direction, you can go to justf. com and here under equity strategy, you can select value. Okay?

And this would give you access to all kinds of value ETFs. Now, if you want to see what kind of dividend yields they pay, then I would go here to use of profit and look at the distributing versions because only distributing ETFs show a dividend yield on just ETF. And here we see that for example, for this American value ETF, the dividend yield is 2.

4%. Which is significantly higher than for the US market as a whole. As we remember, for the S&P 500, it was just 1.

18%. Okay? And you can see that for these other value ETFs, the dividend yields also tend to be on the higher side.

But of course, value investing is not specifically about dividends. So you could say that this is kind of off-topic. Okay, higher dividends are just a byproduct of investing in value stocks.

So then here's a second strategy which might be interesting. It is tied to something called quality investing. Quality indexes seek to select financially strong companies based on a combination of financial indicators such as stable earnings, a strong balance sheet, dividend growth, and others.

Okay. Now, of course, the challenge with quality investing is that every index provider has a different formula for selecting quality stocks. But if you buy a quality ETF, you are much less likely to be investing in companies which are struggling financially or have very bad prospects for the future.

And historically, quality indexes have done very well. Since 1999, Msei quality indexes have outperformed the market in the US, in Europe, and in emerging markets. So, personally, when looking at dividend investing, I like to look at a combination of quality and dividend yield because this means a company is paying dividends and it's got strong financials.

on just ETF for example, you can look for these kinds of funds by searching for quality dividend or quality income. All right. And here we have funds like the Fidelity US quality income ETF which we saw a few minutes ago.

Okay, which has a 2% dividend yield, not very high but higher than the US market in general and a very nice 5-year result of 106%. We have the Fidelity global quality income ETF which has a slightly higher dividend yield. Then this is an accumulating version of this first fund.

Then we have an emerging markets quality income ETF as well which hasn't performed well but the emerging markets haven't performed well in general. And then we have an Amundi global equity quality income ETF. So if the reason that you're looking for dividend ETFs is to find financially strong companies which can pay a dividend and have good growth prospects, this is what I would look at.

I wouldn't just pick ETFs with the highest dividend yield because those are often not very profitable investments. I would look at either value or quality income ETFs because these tend to have attractive dividend yields and a good profit potential. But there is a couple of other dividend ETFs that viewers often ask me about.

The first one is this. In America, a lot of dividend investors like a quality income fund called SCHD, the Schwab US Dividend Equity ETF. This ETF tracks the Dow Jones US Dividend 100 index.

So, this includes financially strong companies that consistently pay dividends. So, let's look at the website for this ETF. Okay, so here we can look at the fund results and we can see that for example over the past five years the average result for this uh fund has been 11.

86% per year and if you do a quick calculation in Excel that ends up being a 75% total return over the past 5 years and if we scroll up here to yield we see that the yield is around 3. 7% per year right now. So, what's the difference between this SCHD and the Fidelity US Quality Income ETF that we looked at a moment ago?

Well, as we saw, the Fidelity ETF had a significantly higher 5-year return, but it has a lower dividend yield. Okay, so if SCHD was at 3 and a half%, then this was just 2%. The reason is that the Fidelity ETF actually also invests in these big tech companies.

Okay. So if I open this up and look at holdings, we have Apple, we have Nvidia, we have Microsoft. Okay.

So these are tech companies which pay a respectable dividend but um the stock price is quite high. Okay. So the yield is relatively low.

Many investors like SCD because it doesn't have this exposure to these very expensive tech companies. If you look at the top holdings, you have this pharma company, you have Coca-Cola, you have biotech, you have Cisco, which is like IT systems. Okay.

Um, but you don't have Microsoft and Amazon and and all these very expensive tech companies. Now, on the downside, that is why this fund has been less profitable over the past 5 years. But on the plus side, if you're worried about an AI or tech bubble, if you want kind of lower stock prices and higher dividend yields, SCHD can be quite attractive.

Now, unfortunately, you cannot buy SCD directly in most European countries because of EU regulations, and there is no direct equivalent to SCD available to European investors. As far as I know, the closest equivalent really would be this Fidelity fund, but it's not even that close. If you are really set on buying this fund, well, one thing you can do is um replicate this ETF on your own because it's a relatively concentrated um ETF.

Okay, if we look at the top 10 stocks here, they actually make up around 40% of the total value of the ETF. The top 20 stocks make up more than 70% of the value. So, you can actually get a very similar result as this ETF by simply buying these 20 stocks.

This can be very convenient on a platform like trading 212, which has this feature called pies. Okay, you make a custom pie and here you can just add all the stocks. Like for example, the biggest one was this ADV.

So, I can add that one. Then we add like CocaCola. I can add that one and and so on down the line.

And here I can define what percentage goes into each uh each uh stock. And you can do it in proportion to the actual ETF. Now, honestly, would I do this?

Probably not. I mean, your tax reporting is going to get a lot more complicated. And there's not that much reason to believe that SHD will necessarily get you a better profit than simply buying a total market ETF that invests in the whole American or global stock market.

But if it's what you really want, this is how you can do it. The other ETF people ask about is JPQ, the JP Morgan NASDAQ Equity Premium Income Active ETF. This is an actively managed ETF.

It's outside of what I usually look at, but it's actually an interesting case because it reveals this weird mystery in the world of high dividend paying ETFs. If you look at the website for this fund, you see that it invests in NASDAQ stocks, okay? And the dividend yield is 10%.

Which is crazy high. And that's weird because if you look at the NASDAQ 100 dividend yield, it's 0. 8%.

So, how do you go from stocks that pay 0. 8% 8% per year in dividends which is very low to an ETF which invests in these stocks which pays 12 times more. Well, to understand this mystery you have to look at the investment strategy of this ETF.

And here's some really complicated language about and disciplined options overlay which implements written out of the money NASDAQ call options. But basically this ETF is selling derivatives. it is selling what are called call options on NASDAQ stocks and that's how it's making this big income which it is paying out as dividends.

Now if the stock price is bouncing up and down a little but staying mostly flat, this kind of ETF can be very profitable. But if the price shoots up, it really underperforms the market. You can do all sorts of crazy fancy things with options and that can make these sorts of ETFs super attractive on the surface.

A lot of investors look at it and they think, "Oh, that looks really nice. I want a 10% dividend yield. " But at the end of the day, over the long term, when you buy one of these covered call NASDAQ ETFs, you are very likely to underperform a simple NASDAQ 100 ETF.

All of these fancy strategies inevitably involve higher costs than a simple ETF that buys a bunch of stocks. So, I would only be interested in this kind of ETF if I had some weird tax situation where I really want dividends and I don't want capital gains. I don't want the price going up.

But otherwise, I don't see much that is attractive about this kind of strategy. That said, if you want to buy this fund as a European investor, no problem. As of October 2024, there is a European version available.

You can just go to just ETF. You can put in JPQ and here it is. So go to town.

Now for European investors, figuring out your investment strategy like dividend ETFs or small cap ETFs or value ETFs, that is just half the battle. You also have to choose between accumulating and distributing funds, physical and synthetic funds, Irish and Luxembourg funds, and more. The best type of ETF for you to buy depends on the country where you live.

Now, to find out more, check out this video where I explain how to find the best ETFs for European investors.