3 Dividend ETFs Perfect for Millennial Investors

Key Points

• The Schwab U.S. Dividend Equity ETF makes for a solid, core portfolio holding.

• The Vanguard International High Dividend Yield ETF provides overseas exposure.

• The Alerian MLP ETF offers one of the highest-yielding investment vehicles around.

• 10 stocks we like better than Schwab U.S. Dividend Equity ETF ›

The market keeps grinding higher with growth stocks leading the way. This has led to even the vaunted S&P 500 becoming very heavily concentrated at the top with megacap tech stocks. With valuations looking high and market leadership concentrated in a handful of powerful tech names, now may be a good time to start dollar-cost averaging into some dividend-oriented exchange-traded funds (ETFs) to add a little more diversity to your portfolio.

For millennials, who were born between 1981 and 1996 and are now roughly in their 30s and early 40s, reinvesting dividends today can compound into meaningful wealth decades from now. But whether you are still building wealth or starting to look for a way to generate extra cash from dividends now, these three dividend ETFs can provide both solid dividend income and add some balance to your portfolio.

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1. Schwab U.S. Dividend Equity ETF

The Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) is a core dividend fund for investors who want to invest in high-quality, dividend-paying stocks. It tracks the Dow Jones U.S. Dividend 100 Index, which doesn't just sit by idly when it comes to which stocks are allowed in the index.

The index is looking for companies with strong balance sheets and free cash flow generation that not just have solid yields but a history of growing their dividends. It adds and subtracts stocks on a yearly basis, and reweights the index quarterly. This helps keep the index from falling into value traps.

The ETF currently has about a 3.7% dividend yield and has generated a 12.3% average annual return over the past decade. That's a solid return that has topped most value-oriented funds in a market that has long been dominated by growth.

2. Vanguard International High Dividend Yield ETF

While the Schwab U.S. Dividend Equity ETF is a great place to start when it comes to dividend ETFs, the Vanguard International High Dividend Yield ETF (NASDAQ: VYMI) can help diversify your portfolio even more by adding a bit of international flavor.

The ETF tracks the FTSE All-World ex U.S. High Dividend Yield Index, which consists of stocks with higher-than-average dividend yields that are in the FTSE All-World ex U.S. Index. The dividend index includes more than 1,500 stocks from countries in Europe, the Pacific, and emerging markets. More than 40% of the stocks in the dividend index are in the financial services sector, with Japanese stocks comprising around 16% of the index and U.K. stocks about 13%.

The ETF has been on fire this year, with a total return of more than 28% through Sept. 18. It's generated a 14.2% return over the past five years, as of the end of August.

3. Alerian MLP ETF

If you're seeking a higher yield and are comfortable with a concentrated exposure to energy infrastructure, the Alerian MLP ETF (NYSEMKT: AMLP) offers one of the highest ETF yields around at 8.1%. It's also generated a 24.7% average annual return over the past five years, as of the end of June.

The fund invests in midstream energy companies that act like toll roads for the oil and natural gas industry. In general, these companies largely earn fees based on volumes, so they are not directly impacted by energy price fluctuations. They tend to generate a lot of cash flow, which they then pay out as distributions.

Over the past several years, midstream stocks as a group have cleaned up their balance sheets and improved their distribution coverage ratios. They are in much better shape financially today than before the COVID-19 pandemic, but ironically trade at a discount today to pre-COVID levels.

Even more, these companies are seeing solid growth opportunities ahead due to increasing energy demand stemming from artificial intelligence (AI). Not only do midstream stocks currently carry high yields, but the companies in the sector are expecting to solidly raise their distributions in the years ahead.

One advantage the Alerian MLP ETF has over picking individual master limited partnerships (MLPs) is that the fund provide investors with a single 1099 tax form instead of K-1s. This makes it easier come tax time.

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Geoffrey Seiler has positions in Alps ETF Trust-Alerian Mlp ETF. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.