With broad Treasury rates seemingly stuck in the doldrums, investors have had to search for yield in other places, such as in the stock market. Fortunately, there is no shortage of equities that can provide investors with current income in what is a very low rate environment.
While any number of stocks that occupy the traditional high yield segments (such as MLPs, BDCs, or utilities/consumer firms) have been quality choices, some investors may be better served by taking an ETF approach instead. By doing this, investors can gain exposure to a wide basket of securities that have yield characteristics, helping to diversify away company specific risk while still offering up sizable payouts.
Although this has proven to be a very popular strategy, many investors seem to overlook the fact that not all dividend ETFs are created equal. Instead, there are various types of dividend ETFs which each have their own pros and cons (read 11 Great Dividend ETFs).
Arguably, no one approach is universally better than the others, but it is undoubtedly important to be aware of the key differences in the space. These variations can result in various return divergences and different levels of volatility as well.
So for investors looking to make a move on the dividend ETF world, it is important to remember that your fund will probably fall into one of the following types of products listed below. Hopefully, this explanation will assist in dispelling some of the main myths in the space, and potentially a few overlooked options in the dividend ETF world as well:
High Dividend Yield ETFs
ETFs that track high dividend paying stocks are probably the most well-known of the bunch but they are by no means the only ones in the ETF world. Funds in this segment only invest in companies that already have high yields, screening out firms that either do not pay any dividends, or those that have paltry yields.
Unfortunately, this approach can add to total risk levels, as sometimes the highest dividend payers are not the safest companies and are only seeing high yields because of low stock prices. With that being said, funds that fall into this segment often crush their counterparts on this list in terms of total yield, making them excellent income replacements for yield starved investors.
Global X SuperDividend ETF (SDIV) – This fund tracks the Solactive Global SuperDividend Index which is a benchmark of 100 equally weighted firms that rank among the highest yielding securities in the world. The benchmark also applies a few dividend stability filters in order to make sure that only the most likely to pay firms are included in the index (see Are There Really High-Dividend Low-Risk ETFs?).
The product charges investors 58 basis points a year in fees and has assets under management of roughly $1 billion. SDIV does pay out a robust yield, coming in at over 5.8% for 30-Day SEC terms, putting it near the top of the high yield ETF market.
Guggenheim S&P Global Dividend Opportunities Index ETF (LVL) - This ETF follows the S&P Global Dividend Opportunities Index which focuses on high yielding securities from around the world. Once again, 100 securities are chosen from around the world for inclusion, with heavy exposure going towards telecom, energy, utilities, and financial securities.
American stocks account for roughly 15% of the total assets, while European stocks, in aggregate, account for over 40% of the exposure profile. The yield comes in at 5.8% for 30 Day SEC terms, while the expense ratio is higher than SDIV, coming in at 90 basis points per year.
Dividend Aristocrats ETFs
For another take on dividend ETF investing, there is what is known as the ‘dividend aristocrats’. These stocks have a long history of raising dividend payments continuously year after year.
Basically, this style includes companies that not only are stable dividend payers, but have been raising dividends for at least the past few decades. This ensures that only the most reliable firms are included in the discussion, although this approach may not always yield the highest amount when compared to other types on this list.
SPDR S&P Dividend ETF (SDY) – This is one of the more popular dividend-focused ETFs on the market as it has just under $12.8 billion in AUM and an average daily volume approaching 700,000 shares a day. This is at least in part due to the ETF’s relatively low expense ratio of 35 basis points and its solid yield which is hovering near 2.3%.
This is achieved by following the S&P High Yield Dividend Aristocrats Index, which is an exclusive club of 60 dividend stocks in the S&P 500. This group only includes firms that have been raising dividends for at least the past quarter century, leaving SDY focused in on consumer staples, industrials, and financials for its exposure (see 3 Excellent ETFs for Growing Dividends).
PowerShares International Dividend Achievers ETF (PID) – This product tracks the International Dividend Achievers Index which follows companies that have increased their annual dividend for five or more consecutive years. With this international dividend focus, American securities account for just 1% of the total, leaving heavy weights for a number of Western nations like Canada and the UK which together make up almost 57% of the portfolio.
The ETF charges investors 58 basis points a year for its services, and like many others on this list, is tilted towards telecoms, energy, and financials. Much like SDY, this isn’t the highest yielding ETF on the list by any means, as the product has a 30 Day SEC yield of about 2.6%, although this is likely to be safer and more durable than some of the high yield choices on the list.
Dividend weighted index ETFs
Another approach is to simply use cash dividends paid as a way to weight stocks in an index. This technique usually replaces market cap weighting and focuses in on large companies that have paid the most, in sheer numbers, out to investors via dividends.
With this approach, ETF investors get a portfolio of stocks that isn’t focused on yield or dividend increases over time, but instead on large firms that have above-average payouts. These companies generally find their way to the top of the list in products using this methodology, although it should be noted that they by no means match or mirror other weighting methodologies like market cap weighted funds.
WisdomTree Total Dividend ETF (DTD) – This fund tracks the WisdomTree Dividend Index which is a benchmark of American dividend payers weighed by aggregate cash dividends that the company is projected to pay in the coming year. This gives the product a focus on traditional top yielders from key industries like technology, financials, staples, health care, and industrials (read 4 Excellent Dividend ETFs for Income and Stability).
The entire product is focused on American securities and is quite cheap, costing just 28 basis points a year. However, since the ETF weights on total dividends rather than yield, the payout might be a little light for some, as the 30-day SEC yield comes in at just 2.5%.
WisdomTree International SmallCap Dividend ETF (DLS) – For an international approach that weights securities on expected cash dividends, investors could consider DLS for their exposure. The fund tracks a benchmark of securities that are from outside North America and that are also dividend paying and in the bottom 25% of the market capitalization of the WisdomTree DEFA Index after the 300 largest firms have been removed.
The focus on international securities does boost the expense ratio up to 58 basis points, although it should be noted that the product is focused in on a few nations like Japan, the UK, and Australia for over 50% of its total exposure. Meanwhile, the fund currently pays out a solid 2.06% in 30 Day SEC terms, although it should be noted that volatility could be rather high in this small cap ETF.
Hybrid Dividend ETF
The last way is sort of a combination of any of the above metrics, or a more ‘quantitative’ approach as well which takes into account various factors in order to determine which stocks are included in the benchmark. This method can often be safer than any of the above listed choices, but it also tends to cost extra due to the more ‘hands-on’ approach (see 3 Income ETFs for Yield Starved Investors).
Some examples of this include funds that utilize dividend weighting but also dividend increases per share and company valuation metrics. Other types of ‘hybrid’ dividend ETF include screening by dividend per share growth levels, payout ratios, and other forms of dividend metrics in order to target only a subset of high yielding securities.
First Trust Morningstar Dividend Leaders ETF (FDL) – This popular ETF uses a variety of metrics in order to select 100 securities, weighted on dividend yield, for the index. The process for including the securities is based on Morningstar’s proprietary multi-step screening process which looks for dividend consistency and sustainability.
With this process, we can that FDL is a classic ‘hybrid dividend ETF’ as it uses a dividend weighting approach with stock selection characteristics.
Still, it should be pointed out that the security is heavily weighted towards health care, telecoms and utilities as these three account for over 60% of assets. Investors should also note that despite the intense methodology, costs aren’t too bad coming in at 45 basis points a year, while the dividend yield, in 30 Day SEC terms, is rather robust at just under 3.4%.
iShares Dow Jones Select Dividend ETF (DVY) – This ETF also weights securities based on their dividend yield although it goes beyond that to find the 100 securities that comprise the fund. Among the criteria used to pick the top dividend stocks include; dividend-per-share growth rate, dividend payout percentage, and daily volume in order to screen out illiquid companies as well as those that might not have the most sustainable dividends.
This approach produces a fund that has a decent yield of roughly 3.05% in 30 Day SEC terms while charging investors a rather low 39 basis points a year in fees. Top sectors include utilities, consumer goods, and industrials, although financials, oil, and consumer services account for another 20% combined as well for this U.S.-focused dividend ETF.
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