However, it would be a mistake to assume all dividend ETFs are
the same. There are 13 ETFs that attempt to maximize yield using
U.S. companies, 10 of which have been around for at least a
year.
Many are designed differently and yield very different results,
so it's important to know what you're getting into and why.
The table below shows the trailing 12-month dividend yield of
each of the 10 ETFs alongside net asset value returns over the same
time period.
I've also included the same figures for SPY as a frame of
reference.
,%20which%20leads%20its%20peers%20with%20an%208.96%20percent%20total%20return%20over%20the%20past%20year,%20only%20paid%20out%202.53%20percent%20in%20dividends.%3C/p%3E%0A%3Cp%3EIn%20comparison,%20the%20PowerShares%20High%20Yield%20Equity%20Dividend%20Achievers%20Portfolio%20(NYSEArca:PEY)%20paid%20out%20a%20segment-high%204.22%20percent,%20but%20only%20returned%202.93%20percent%20on%20a%20total%20return%20basis,%20meaning%20its%20holdings%20depreciated%20in%20value%20even%20while%20paying%20out%20significant%20dividends.%3C/p%3E%0A%3Cp%3EThere%20are%20a%20few%20major%20differences%20between%20the%20dividend%20ETFs%20that%20drive%20these%20different%20yields%20and%20returns.%3C/p%3E%0A%3Cp%3EOne%20is%20their%20respective%20selection%20methodologies:the%20Vanguard%20Dividend%20Appreciation%20ETF%20(NYSEArca:VIG),%20the%20PowerShares%20Dividend%20Achievers%20Portfolio%20(NYSEArca:PFM)%20and%20PowerShares%E2%80%99%20PEY%20all%20require%2010%20years%20of%20increasing%20dividend%20payments.%3C/p%3E%0A%3Cp%3EThe%20iShares%20Dow%20Jones%20Select%20Dividend%20Index%20Fund%20(NYSEArca:DVY)%20requires%20five%20years,%20and%20SDY,%20the%20SPDR%20S&P%20Dividend%20ETF%20(NYSEArca:SDY)%20requires%20a%20whopping%2025-year%20track%20record%20of%20increasing%20payouts.%3C/p%3E%0A%3Cp%3EThese%20screens%20exclude%20all%20but%20the%20most%20stalwart%20dividend%20payers,%20meaning%20that%20higher%20growth%20firms%20that%20have%20only%20recently%20started%20paying%20dividends%20are%20excluded%20now%20and%20for%20the%20foreseeable%20future.%3C/p%3E%0A%3Cp%3E%C2%A0%3C/p%3E%0A%3Chr%20class='system-pagebreak'%20/%3E%0A%3Cp%3EIn%20contrast,%20HDV,%20as%20well%20as%20the%20First%20Trust%20Morningstar%20Dividend%20Leaders%20(NYSEArca:FDL),%20the%20WisdomTree%20Equity%20Income%20Fund%20(NYSEArca:DHS),%20the%20Vanguard%20High%20Dividend%20Yield%20ETF%20(NYSEArca:VYM)%20and%20the%20First%20Trust%20Value%20Line%20Dividend%20ETF%20(NYSEArca:FVD)%20are%20more%20flexible%20and%20allow%20for%20the%20faster%20addition%20of%20companies%20that%20have%20only%20recently%20started%20paying%20dividends.%3C/p%3E%0A%3Cp%3E%3Cimg%20src=)
The clearest illustration of this difference is Apple, which
announced a $2.65 quarterly dividend a few months ago. That
dividend puts Apple in the top tier of dividend payers, but it
won't be captured by SDY-the State Street payout fund-until
2037.
A second difference is how they weight their holdings. VYM, PFM
and VIG all weight their holdings by market capitalization, while
DVY, PEY, SDY, DHS, FDL and HDV all weight holdings based on their
dividend payments. The last fund, FVD, weights its holdings
equally.
These differences roll up into very different portfolios. The
chart below shows the sector allocations of each dividend ETF.
The top performers all held heavy allocations to utilities,
consumer non-cyclicals and health care-areas that have outperformed
the market over the past year.
In contrast, the ETFs that didn't do as well looked more like
the market, which lost 1.54 percent over the last year.
Income is great, and certainly a significant factor to consider
when choosing a dividend ETF. But it doesn't tell the whole
story.
If you're looking for a defensive play, make sure the ETF you're
looking at actually has high allocations to traditionally defensive
sectors.
It's also worth thinking about whether you prefer an ETF of
companies with a long history of payments or an ETF that has the
flexibility to include new constituents quickly as more companies
mature and announce significant dividend policies.
Such choices will shape your portfolio and returns going
forward.
There's no one "best" choice, only the one that makes the most
sense for you.
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