By Ian Salisbury

Want a dividend fund that can beat the S&P 500 index? You can have it, just as long as you are willing to give up one thing -- dividends.

There are more than 340 U.S. stock mutual and exchange-traded funds that market themselves as dividend vehicles, according to fund tracker Morningstar. Just one of them has managed to beat the S&P 500 over the past decade: First Trust Rising Dividend Achievers.

The $22 billion ETF looks for companies that hike their dividends while showing healthy earnings growth and high levels of cash relative to debt. It has returned 15.8% a year over the past decade, nosing out the benchmark index, which has returned 15.6%, through May 8.

Dividend funds have long struggled in a market dominated by technology. Tech stocks yield just 0.4% on average, compared with 3.1% for real estate and 2.6% for energy and utilities stocks.

The First Trust fund bolstered its performance by leaning into the trend. Its three top holdings are semiconductor equipment manufacturers Lam Research, Applied Materials, and KLA, all of which have seen their share prices skyrocket more than 100% in the past 12 months. Alphabet and Nvidia are also in the top 10.

While those picks have helped the fund deliver standout total returns, they don't do much in terms of dividend yield. Today, the S&P 500's dividend yield stands at just 1% -- close to historic lows. First Trust Rising Dividend Achievers' payout is actually lower than the broad market's -- just 0.9%. By contrast, the average among dividend ETFs is about 2.6%.

So, why own a dividend fund that actually yields less than the market?

"Philosophically, if you are investing in stocks as opposed to bonds, you want some level of growth," says Ryan Issakainen, an ETF strategist at First Trust. "Stocks with higher yields tend to be more mature companies that don't have the same prospects for dividend growth. This gives you the potential, five or 10 years from now, to get a raise along the way."

To that end, stocks in the fund grew their dividends by 15% annually over the past three years, on average, compared with 12% for the S&P 500, he notes.

Still, for investors looking to cash their dividend checks and live off the income, accepting an annual payout of less than 1% may be a tall order. "If you are focused on yield, this is not the right ETF for you," says Aniket Ullal, head of ETF research at CFRA.

For investors looking for a less extreme version of the dividend growth strategy with more a generous payout, he recommends the $125 billion Vanguard Dividend Appreciation ETF, which also has plenty of tech. Top holdings are Broadcom, Apple, and Microsoft.

Its 1.5% dividend yield handily beats the S&P 500's, although investors do face some sacrifices when it comes to performance: It has returned 13% a year, on average, over the past decade.

Another option is the $39 billion iShares Core Dividend Growth ETF, which yields 2% and has a 10-year average annual return of 13.2%, Ullal says.

The Vanguard and iShares funds do have one advantage over First Trust Rising Dividend Achievers -- much lower fees. The First Trust fund carries an annual expense ratio of 0.47%, which is relatively high considering the average fee across all mutual funds and ETFs is 0.34%, according to Morningstar. By contrast, the iShares fund charges just 0.08% of fund assets, and the Vanguard fund just 0.04%.

Write to Ian Salisbury at ian.salisbury@barrons.com

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(END) Dow Jones Newswires

May 15, 2026 21:31 ET (01:31 GMT)

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