Given the uncertain situation in Europe and slowing growth in U.S. as well as in major emerging economies, the markets are likely to stay volatile for the rest of this year. Many investors are thus trying to seek refuge in “safe-haven” assets like Treasury bonds, sending yields to all-time lows.
But the lower the yields go, the more risky these investments become due to potential loss when the interest rates rise. Further at current levels, investment in Treasury bonds is likely to result in loss of capital in real terms. (Read: Forget T-Bonds, Invest in These Top Corporate Bond ETFs)
High quality dividend stocks and ETFs are a better option for investors searching for yields in the current environment of rock-bottom interest rates. At the same time, since most dividend paying companies are stable, mature companies, these investments also provide greater stability and safety in volatile environment.
Below we have highlighted three ETFs that invest in high quality, low-risk stocks and are excellent investment options for investors seeking stability along with steady cash flows (Read: Three ETFs for The Unconventional Oil Revolution)
Vanguard Dividend Appreciation ETF (VIG)
VIG follows the Dividend Achievers Select Index, which is composed of common stocks of high quality companies that have a record of increasing dividends for at least 10 years. The fund uses a passively managed, full-replication approach to track the index. Launched in April 2006, the fund is now the largest dividend ETF, with $11 billion in AUM.
The fund currently holds 133 securities, with a median market cap of about $40 billion. While IBM (4.2%), Coke (4.2%) and P&G (4.0%) are top three holdings; the fund is pretty well diversified with ten largest holdings accounting for 38.6% of the holdings. The ETF is heavily weighted towards Consumer Staples (25%), Industrials (22%) and Consumer Dictionary (15%) sectors.
With an expense ratio of 0.13%, this is one of the cheapest funds in this space. Further, the annual turnover rate is just about 14%. The ETF has returned 2.1% over one-year period, while the year-to-date return is 3.7%. (Read: 11 Great Dividend ETFs).
Annual dividend yield at 2.15% is just slightly above average S&P dividend yield, but this fund is better suited for investors who seek long-term capital appreciation along with income and not just high current yield. The fund has a beta of 0.82 vs. S&P 500.
iShares High Dividend Equity (HDV)
HDV tracks the Morningstar Dividend Yield Focus Index, which is designed to measure the performance of select group of companies that have provided high dividend yields on a consistent basis.
Launched in March last year, the fund has already attracted $1.8 billion in AUM. The ETF currently holds 75 stocks with AT&T (10%), J&J (7%) and Pfizer (7%) being the top holdings. With almost 61% of the assets in top ten holdings, this fund is much more top-heavy compared with VIG.
In terms of sector exposure, Health care (29%), Consumer Goods (24%) and Telecom (16%) occupy the top spots. The beta of the fund is 0.37 vs. S&P 500, indicating very low volatility.
The fund charges an expense ratio of 40 basis points per annum, while the dividend yield is 2.9% currently. Since inception the fund has returned 17.3%, and it is up 3.7% year-to-date.
No discussion on Dividend ETFs can be complete without considering emerging market Dividend ETFs, which are excellent choice for investors seeking income, while preserving the growth option. In the emerging markets space, our recommendation for the current volatile environment is HILO. (Read: Top Two Emerging Market USD Bond ETFs Head-to-Head)
EGShares Low Volatility EM Dividend ETF (HILO)
HILO tracks INDXX Emerging Market High Income Low Beta Index, designed to provide high income and to be significantly less volatile through the utilization of low beta stocks. The index has a beta of 0.91 vs. MSCI EAFE Index. Further, the Index limits concentration in any position to 5% and country exposure to a maximum of 5 positions.
Thailand (16.9%), China (16.7%) and Brazil (16.1%) occupy the top spots in terms of country exposure. The fund holds 30 securities with an average market cap of about $12 billion. Due to its focus on low-volatility, high-dividend stocks, the ETF is tilted towards Telecom (30%), Industrials (16%) and Utilities (15%) sectors.
The fund has an expense ratio of 85 basis points and the index dividend yield is 6.4% currently. It has returned 2.31% year-to-date.
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