By Christian Magoon
CEO, Magoon Capital
With the S&P 500 trending down since the beginning of May, it's important to review the benefits of dividend investing and highlight three top performing dividend ETFs this year. These ETFs have held up well over the last month versus the S&P 500 and offer the appealing proposition of being "paid to wait, poised to rally." To begin, here is the performance chart from NASDAQ.com, illustrating the S&P 500 ETF (SPY) versus the ETFs from Vanguard and Schwab we will highlight in more detail shortly: VIG, VYM and SCHD.
Dividends have been a large contributor to the return of benchmarks like the S&P 500 - around 40% of the total return historically. One timely benefit of a dividend focus is the defensiveness it provides investors during choppy markets. For some investors, dividend-focused ETFs have been a convenient way to access low cost and transparent baskets of dividend-paying stocks. Here are three best in class dividend ETFs to consider.
The three best performing dividend ETFs of 2012 take slightly different approaches but share one common characteristic - ultra low cost. The three ETFs charge annual expense ratios of between 13 - 18bps. In contrast, the average expense ratio of all stock mutual funds was 79bps last year. In addition, the ETFs all have year to date total returns around the 7% mark versus SPY at 11.8%. This under performance reflects two factors. First, in 2012 the market has primarily appreciated. Second in periods of market appreciation of depreciation dividend investing often produces muted results. Thus when compared to investing in the broad equity market, dividend investing can underperform in the good times and outperform in the bad times.
The most aggressive dividend ETF of the top three performers in 2012 is also the best performer thus far. The Vanguard High Dividend Yield ETF (VYM) tracks an index that focuses on high current income and thus generates a healthy 30 Day SEC Yield of 3.2%. At just 13bps, VYM's category low expense ratio also helps investors squeeze more out of the stocks it invests in. Year to date, VYM has gained 7.79% after returning a bit over 10% in 2011. As dividend paying stocks tend to be bunched in certain sectors, here's VYM's most recent sector breakdown versus the previous year from the Vanguard website. It is interesting to note that this portfolio is fairly balanced among a variety of sectors in comparison to some of the other dividend ETFs we will review.
The second best dividend ETF in performance this year is also from Vanguard. The Vanguard Dividend Appreciation ETF (VIG) takes the most balanced approach to dividend investing of the three top dividend ETFs by focusing less on current income and more on blending income and capital appreciation potential. Accordingly VIG's 30 Day SEC Yield is 2.12%, a fair amount less than VYM but larger than SPY's yield figure of 2%. VIG has generated a 7.2% gain this year after a 6.1% return last year. Here's the sector breakdown and comparison year over year from Vanguard's website. Note that Consumers and Industrials make up 60% of the sector weighting today.
Chasing Vanguard's top two performers is the Schwab U.S. Dividend Equity ETF (SCHD). It tracks an index of 100 high dividend yield stocks that have paid dividends for at least 10 consecutive years. The 30 Day SEC Yield of SCHD is right in between the Vanguard products at 2.9%. In fact, overall SCHD seems designed to fit right between the two Vanguard Dividend ETFs. Year to date SCHD has gained 6.95% but hasn't hit its one year anniversary yet which occurs in October. SCHD contains over $370 million of investors assets despite its recent launch. Here's the current sector breakdown of the Schwab U.S. Dividend Equity ETF as found on the Schwab website. Note that SCHD's weightings in Consumers and Industrials are most similar to VIG, yet it delivers yield closer to VYM.
Each one of the three top performing dividend ETFs offer unique yet attractive combinations of defensiveness in choppy markets, low expense ratios and attractive income to investors. While dividend ETFs will usually lag in markets rocketing upward, they often provide the type of a cushion that can help equity investors sleep better when markets are troubled.