The Best Dividend Stocks and ETFs for a Roth IRA Contribution (2024)

It is that time of the year again for retirement-focused investors.

Any retirement contributions for tax-advantaged accounts must be in soon, or have likely just been made by many investors. But now that the cash is in the account, what are the best investments to make right now?

I personally like the area of dividend growth, though you cannot discount earnings growth either. Stocks that have shown an ability to grow earnings and pay solid yields can be impressive choices for long term investors. However, it is important to consider what type of account you have first, and to make sure that you are using this strategy in a Roth account for some of the reasons outlined below.

Dividends and Retirement Accounts

In a Roth account, a withdrawal isn’t taxed at all (assuming you wait long enough of course). You already paid the tax on that money when you initially put it in the account, so no need to pay taxes a second time. This means that any dividends that you were paid over the course of the holding period are not taxed, saving you on long-term capital gains taxes (Best Stocks and ETFs for Your IRA).

Meanwhile, for traditional IRAs, you are paying taxes at distribution. This definitely saves you in the beginning—and especially since contributions are often tax-deductible-- but consider the dividend situation. Instead of getting taxed on dividends at today’s long-term capital gains tax rate of 20% (for those in the higher brackets) or rates as low as zero (for those in lower brackets), you are getting taxed at regular income rates, which can be as high as 39.6% (see 5 ETFs for Your 2015 IRA Contribution).

In other words, you are paying nearly double—and in some cases far more—in taxes on any dividends accrued in traditional IRAs than if you had just held them in regular accounts. That is why putting dividend focused securities in a Roth account is really the way to go for investors who like income stocks and ETFs.

Best Investments for a Roth IRA

For these investors, a focus on companies that not only pay a nice yield but have shown an ability to grow dividends over time is essential. This look at dividend growth is especially advantageous for the long term, and particularly for those in a Roth account. You also want to find investments that can grow earnings too, as you want to take advantage of the Roth structure as possible.

So if you are looking for some ideas for this year’s Roth IRA contribution, make sure to consider any of the ETFs or stocks below as they could make fine picks for income investors in today’s market environment:

DineEquity (DIN)

DIN is the owner and operator of two of America’s best known casual restaurant chains, IHOP and Applebee’s. What you may not know about the company is that it also sports an impressive yield, coming in at just under 4%.

Yet, while DIN is in a class by itself when it comes to yield, investors should also note that the company has a solid track record when it comes to dividend growth. In fact, over the past five years, DIN has grown dividends by over 30% (see 5 ETFs for a Retirement Portfolio).

The stock is looking impressive beyond its great dividend metrics though, as the stock has a Zacks Rank #2 (Buy) and a VGM score of ‘B’ as well. Clearly, this is a well-rounded security that is worth a closer look by dividend-focused investors.

Vail Resorts (MTN)

Another dividend stock worth watching in the broader consumer space is MTN. The company runs a series of ski resorts across the U.S. (and one in Australia), with a focus on luxury properties. MTN also pays out a nice yield, coming in at about 2.5% per year for investors.

But what Vail lacks in yield it makes up for in growth, including a five year growth of over 44% in dividends. Add that to an ‘A’ VGM score on the growth front and it is clear that MTN is a great stock for dividend growth, and ‘regular’ growth, too.

MTN also has a Zacks Rank #2 (Buy), while its leisure industry rank is in the top fifty percent of industries as well. So, not only is this stock well-positioned from a dividend perspective, but it may be an interesting time to look at this buy ranked stock for further price appreciation as well.

ETFs

There are plenty of ETFs that track the large cap dividend aristocrat market, and many of these would be great for Roth IRA contributions. However, we have talked about these many times (you can see a recent article here: How You Can Beat the Market with Dividend Aristocrat ETFs ) and I think there are other choices that might also work for investors right now that go beyond the traditional large cap focus:

WisdomTree U.S. Quality Dividend Growth Fund (DGRW)

For investors that want to focus on growth more than growth of dividends, DGRW may be an interesting selection. The fund focuses on large cap companies that pay dividends, but also have growth characteristics as well. The ETF zeroes in on companies with high long-term earnings growth expectations, but also those that have high ROEs and ROAs too.

Right now, this focus leaves investors with a yield of about 2.2% and a focus on the consumer, industrial, and technology sectors. Roughly 300 stocks find their way into the portfolio and there is a decent, but not spectacular, breakdown among individual securities to ensure that no single stock receives too much, though KO does take up about 4% of the total (also see 6 Quality Dividend ETFs for Safety and Income).

This fund is more appropriate for investors who want to focus on growth stocks that also pay a decent yield. While this strategy may not be for everyone, it could be an ideal one for investors with a long time horizon, such as those in a Roth retirement account .

Russell 2000 Dividend Growers ETF (SMDV)

This ETF follows in the footsteps of its large cap aristocrat cousins, though there is a key difference. SMDV focuses on the small cap space, an area that is better known for its growth prospects, following the Russell 2000 Dividend Growth Index.

This produces a fund that has a 30-Day SEC Yield that is slightly higher than the S&P 500, while it has an expense ratio of 40 basis points. It focuses in on stocks that have grown their dividends for at least 10 consecutive years, holding those that pass this screen in an equal weighting.

Right now, this results in an ETF that has about 56 stocks in its portfolio, and a focus on sectors like utilities, financials, and industrials. It could be a good choice for investors who like the higher growth potential and more domestic focus of the small cap world, but want a dividend-centric approach as well (see Why Invest in Dividend Aristocrat ETFs Now? ).

Bottom Line

If you have a Roth IRA you may be struggling to decide what to put into your account with your latest contribution. Just remember the key aspects of the account and that while you have to pay taxes initially, this money grows tax-free and it favors certain types of investments as a result.

One area that is especially promising in a Roth account thanks to this treatment is the area of dividends. In a Roth account investors do not have to worry about yearly taxes on dividends, making this a great place to put stocks that not only pay dividends, but have shown an impressive track record when it comes to increasing payments over time as well.

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DINEEQUITY INC (DIN): Free Stock Analysis Report

VAIL RESORTS (MTN): Free Stock Analysis Report

WISTR-US QD (DGRW): ETF Research Reports

PRO-SH R2000 DG (SMDV): ETF Research Reports

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