As more investors turn to divided-paying stocks and exchange traded funds in their search for yield, it is important to fully understand the dividend ETF investment, lest it provides some nasty surprises down the line.
For starters, ETFs with the “dividend” moniker don’t all provide the same exact exposure to dividend investing, Sue Thompson, Head of the Registered Investment Advisor Group and 401(k) Sales at iShares , wrote in a blog. For instance, the overlap between iShares’ five equity dividend ETFs ranges from 0% to 21%, depending on which two are compared. [The Risks and Rewards of Dividend ETFs]
One reason for similar overlaps between two funds is that they track a similar benchmark index. Different indices will hold varying stock components, which will also be mirrored by their respective ETFs. This variation is especially pronounced in domestic dividend ETFs compared to international dividend ETFs.
“Because dividend ETFs aren’t all cut from the same cloth, opting for more than one fund can potentially help you diversify your search for dividend income,” Thompson said. “That dividend ETFs aren’t all the same also shows just how important it is to do your due diligence before buying a fund, making sure you understand the index methodology and what you are going to own.”
Additionally, investors should not allow high yields to blind their investment strategy. Thompson points out that if you put all of your wealth into an investment only because of its high-yields, you may become overexposed to a single market or sector that may not have a sound outlook. Potential investors should always judge whether or not the investment fits with their investment portfolio and allocate accordingly. [Four High-Yield Dividend ETF Options]
Lastly, don’t forget that dividend ETFs are based on stocks, too. Russ Koesterich, the iShares Global Chief Investment Strategist, also points out that investors should focus “on a return target for our portfolio rather than on an asset’s income potential.” If an investor overweights high-yield options, an individual may become over exposed to risky stocks and diminish the overall diversification of an investment portfolio. [Is Dividend ETF Investing Risky Business?]
Dividend ETFs include:
- First Trust Morningstar Dividend Leaders Index Fund (NYSEArca: FDL - News)
- First Trust Value Line Dividend Index Fund ETF (NYSEArca: FVD - News)
- iShares Dow Jones Select Dividend Index ETF (NYSEArca: DVY - News)
- iShares High Dividend Equity Fund (NYSEArca: HDV - News)
- PowerShares ETF Trust Dividend Achievers Portfolio (NYSEArca: PFM - News)
- PowerShares High Yield Equity Dividend Achievers Portfolio (NYSEArca: PEY - News)
- Schwab US Dividend Equity ETF (NYSEArca: SCHD - News)
- SPDR S&P Dividend Aristocrats ETF (NYSEArca: SDY - News)
- Russell Equity Income ETF (NYSEArca: EQIN - News)
- Vanguard Dividend Appreciation ETF (NYSEArca: VIG - News)
- WisdomTree Equity Income Fund (NYSEArca: DHS - News)
- WisdomTree Total Dividend Fund (NYSEArca: DTD - News)
- WisdomTree LargeCap Dividend Fund (NYSEArca: DLN - News)
- WisdomTree MidCap Dividend Fund (NYSEArca: DON - News)
- WisdomTree SmallCap Dividend Fund (NYSEArca: DES - News)
- WisdomTree Dividend ex-Financials Fund (NYSEArca: DTN - News)
- Vanguard High Yield Dividend Index (NYSEArca: VYM - News)
For more information on dividend funds, visit our dividend ETFs category.
Max Chen contributed to this article.