When investors think about stocks that could make them millionaires, they most likely start with tech stocks. Nvidia perhaps? Maybe Alphabet? How about even Space Exploration Technologies (a.k.a. SpaceX)?
One of the best millionaire-making groups, however, is dividend stocks. Yes, they’ve gotten overlooked for a while as the artificial intelligence (AI) revolution takes hold. But they’re also one of the more historically proven ways to build long-term wealth.
There are three primary factors to consider when selecting dividend stocks: dividend growth, dividend quality, and high yield. Selecting one without consideration of the other two can leave your portfolio lacking. But if you consider at least two of these factors together, you start identifying some really good dividend stocks.
The iShares Core High Dividend ETF (HDV 1.31%) follows this philosophy. It targets high-yielding stocks while considering two quality metrics. This helps ensure investors can capture a safer, above-average yield that can help them become millionaires over time.
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How this iShares ETF constructs its portfolio
The iShares Core High Dividend fund tracks the Morningstar Dividend Yield Focus Index. It targets dividend stocks that clear two proprietary Morningstar quality screens:
- Economic Moat: These companies have a sustainable competitive advantage that helps ensure long-term sustainability.
- Distance to Default: Financial health is measured to identify companies in a position to continue paying dividends over the long term.
The iShares Core High Dividend ETF selects roughly 75 stocks by dividend yield. Those qualifying components are then weighted by the total dollar amount of dividends paid rather than yield.
The portfolio ends up being rooted in balance sheet health before being tilted to emphasize yield. It has an incredibly low 0.08% expense ratio and a current yield of 3%.
iShares Trust – iShares Core High Dividend ETF
Today’s Change
(-1.31%) $-0.36
Current Price
$27.11
Key Data Points
Day’s Range
$27.01 – $27.43
52wk Range
$23.16 – $28.18
Volume
102
Why dividend yield and high quality work well together
Many income seekers focus on yield. They often think that higher yields present a quicker path to wealth. But choosing stocks solely based on their yields can be dangerous.
That’s because a yield number alone doesn’t indicate whether it’s sustainable. A high yield could be due to a falling share price caused by poor corporate performance. It could mean the company is paying out too much cash and risks having to cut its dividend. It could mean the company has few growth opportunities and has chosen to pay its earnings out to shareholders.
Using quality metrics as a first path for stock selection helps confirm that companies are in a strong financial position to pay, sustain, and grow their dividends over time. The fund’s weighting methodology, which emphasizes dividends paid over company size, is unique in the dividend ETF category. Focusing solely on dividend growth or quality can yield a low-yielding portfolio. The iShares Core High Dividend ETF, however, can generate a yield nearly three times that of the S&P 500.
It’s this setup that is ideal for long-term wealth creation. Building a portfolio around durable, high-quality cash flow generators with above-average yields can turn a simple investment strategy into a million-dollar portfolio down the road.
