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 (
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
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
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
SPDR S&P Dividend ETF (
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
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 (
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
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
WisdomTree Total Dividend ETF (
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
4 Excellent Dividend ETFs for Income and
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
WisdomTree International SmallCap Dividend ETF (
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
First Trust Morningstar Dividend Leaders ETF (
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
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 (
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
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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ISHARS-SEL DIV (DVY): ETF Research Reports
WISDMTR-TOT DIV (DTD): ETF Research Reports
SPDR-SP DIV ETF (SDY): ETF Research Reports
PWRSH-INTL DVD (PID): ETF Research Reports
GLBL-X SUPERDIV (SDIV): ETF Research Reports
GUGG-SP GLBL DV (LVL): ETF Research Reports
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