Choose The Right Payout ETF

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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.

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Dividend Summary

One interesting thing you’ll note is that the ETFs with the highest dividend yield aren’t the ETFs with the highest total returns. The iShares Dividend Equity Index Fund (HDV - News), which leads its peers with an 8.96 percent total return over the past year, only paid out 2.53 percent in dividends.

In comparison, the PowerShares High Yield Equity Dividend Achievers Portfolio (PEY - News) paid out a segment-high 4.22 percent, but only returned 2.93 percent on a total return basis, meaning its holdings depreciated in value even while paying out significant dividends.

There are a few major differences between the dividend ETFs that drive these different yields and returns.

One is their respective selection methodologies:the Vanguard Dividend Appreciation ETF (VIG - News), the PowerShares Dividend Achievers Portfolio (PFM - News) and PowerShares’ PEY all require 10 years of increasing dividend payments.

The iShares Dow Jones Select Dividend Index Fund (DVY - News) requires five years, and SDY, the SPDR S'P Dividend ETF (SDY - News) requires a whopping 25-year track record of increasing payouts.

These screens exclude all but the most stalwart dividend payers, meaning that higher growth firms that have only recently started paying dividends are excluded now and for the foreseeable future.

 

In contrast, HDV, as well as the First Trust Morningstar Dividend Leaders (FDL - News), the WisdomTree Equity Income Fund (DHS - News), the Vanguard High Dividend Yield ETF (VYM - News) and the First Trust Value Line Dividend ETF (FVD - News) are more flexible and allow for the faster addition of companies that have only recently started paying dividends.

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Sectors

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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