Over the long-term, high-quality dividend-paying stock exchange traded funds could produce outperforming results. The iShares Core High Dividend ETF (HDV) is one ETF that can position investors for years of consistent, dependable dividends.
HDV, which tracks high-quality U.S. companies that have been screened for financial health and relatively high dividends, is chock full of dependable dividend sector and groups that, in recent years, have displayed favorable dividend growth traits. For example, consumer staples and healthcare names combine for over 35% of the ETF’s weight.
Stocks with steady dividend yields reassure investors of a company’s strong financial health. Additionally, dividend-paying stocks typically outperform those that do not pay over the long haul, with less volatility, due to the compounding effect of dividends on the investment’s overall return.
Dividend growth as a means of trumping inflation could and arguably should serve to highlight the advantages of the ETFs that focus on dividend growth stocks. That group is comprised of well-established ETFs that emphasize dividend increase streaks as well as a new breed of funds that look for sectors chock full of stocks that have the potential to be future sources of dividend growth.
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HDV “tracks the Morningstar Dividend Yield Focus Index, a dividend-weighted index that is composed of 75 U.S.-listed stocks screened for both dividend sustainability and high earnings. Fund holdings are weighted by the amount of cash dividends paid rather than by dividend yield ,” according to Investopedia.
Company stocks that issue high yields may be masking their distressed books or may not be sustainable and are heading for dividend cuts. On the other hand, these quality dividend ETFs try to limit the impact of these value traps by selecting components based on a history of sustainable dividend growth.
To that end, HDV allocates less than 14% of its combined weight to high-yielding utilities and telecom stocks. Interestingly, the ETF’s largest sector weight is 20.7% to energy, the sector that has seen the most negative dividend action over the past year. However, HDV’s largest energy holdings are Dow components Exxon Mobil (XOM) and Chevron (CVX), companies that have not been dividend cutters.
“The expense ratio for HDV is 0.12%, well below the large-value category average of 0.32%. The 12-month dividend yield as of May 2016 is 3.6%. The fund’s five-year average annualized return is 11.85%, outperforming the category average of 10.89%. As of mid-May 2016, the fund was up 8.42% year to date (YTD), which was much better than the category average 3.85%,” adds Investopedia.
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iShares Core High Dividend ETF
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.