Almost every corner of the global financial landscape is now tradable via the over 1,400 ETFs available in the U.S. Dividends are a very popular market segment and with interest rates in many countries near all time lows, dividend paying stocks, and the ETFs associated with them, are attracting additional investor attention. The low yield in money market instruments, and the potentially higher yield of dividends, is just one of the factors driving the attraction to dividend ETFs [see The Best Dividend ETF For Every Investment Objective].
What’s the Appeal?
Dividend ETFs invest in a basket of dividend-paying stocks or track a dividend index, so when you buy the ETF you’re getting more diversification than if you purchased just a single dividend stock. The yield on dividend stocks is also typically higher than what is available in Treasuries, savings accounts or Certificates of Deposit. Expense ratios are also relatively low for dividend ETFs, when compared to more actively managed funds, since the portfolio management approach is a passive one.
One drawback of investing in a dividend ETF is that the fund’s yield will be less than what you could get by buying single high-yielding dividend stocks. This could be a necessary sacrifice, though, in order to gain diversification within the portfolio [see 8% Yield ETFdb Portfolio].
Consistency vs. Yield
Yield is one aspect of dividend investing, but you also need to consider consistency. Some companies have a poor history of living up to their dividend commitments, or stop and start dividends frequently, so finding a balance between yield and consistency is important. There are multiple funds with different strategies for dividend stock selection that allow you to find this balance. You can also own multiple dividend ETFs to calibrate your portfolio exactly to your yield and consistency requirements.
If you’re focused on yield, and want the highest income potential regardless of whether the yield goes up or down, there are multiple ETFs available to you. The S&P Global Dividend Opportunities Index ETF (LVL, C+) offers a high yield by investing in stocks, limited partnerships and depository receipts.
The Global X SuperDividend ETF (SDIV, B+) is another fund focused specifically on high yield, investing in the highest yielding dividend equities around the world [see also How To Pick The Right ETF Every Time].
If you prefer consistent income, and don’t mind giving up a little yield to get it, then the First Trust Morningstar Dividend Leaders Index Fund (FDL, B) may provide the consistency you seek. The fund uses a screening process to select the top 100 stocks based on yield, dividend consistency and sustainability.
The Vanguard Dividend Appreciation ETF (VIG, A) is one of the largest in the dividend ETF category and tracks stocks that have a history of increasing dividends for at least 10 years. This fund is a hybrid between consistency and yield. You’re not going to get the highest yield available, but the 10-year history used to select the stocks means the dividend payments will likely continue to be consistent.
Wisdom Tree Total Dividend Fund (DTD, A) is another ETF that takes a more balanced approach, investing in dividend stocks that pay regular cash dividends but that also meet other requirements such as liquidity and capitalization minimums.
Global equities also provide dividends, as well as diversification benefits. Since interest rates, yields and risks vary from country to country, holding a basket of global as well as domestic stocks can potentially increase (or decrease) yields by maximizing the number of stocks available to choose from [see Single Country ETFs: Everything Investors Need To Know].
When going global you can pick from emerging market dividends, to dividends offered in established international countries.
The SPDR S&P International Dividend ETF (DWX, B+) includes 100 high yielding dividend stocks from around the world, while the WisdomTree Emerging Market Equity Income Fund (DEM, A-) focuses on high yielding stocks in emerging markets.
Not All Dividend ETFs Offer Ultra High Yields
Of the 61 dividend ETFs tracked by ETFdb, there is a significant range in yields. Each ETF utilizes a different strategy or selection process, resulting in funds that appeal to some investors but maybe not to others. Finding the funds that offer what you’re looking for will require more than just looking for “dividend” in the name.
Annual dividend yields range from 0.32% on the low end, to 8.06% on the high end (as of July 5, 2013); this variance will obviously be a very important consideration when selecting a fund for its income potential. Finding the ETF that is right for you is the most important thing; you don’t want to just pick the highest yield. Some ETFs are more volatile than others, which is something you may also want to consider before investing; the Beta–a measure of volatility–of dividend ETFs ranges from +2.44 to -1.26 [for more on Beta, see: High Beta: Worth the Risk?].
Below we highlight the top five highest yielding dividend ETFs (as of July 11, 2013):
|KBWD||KBW High Dividend Yield Financial Portfolio||7.37%||$1.84|
|DVYL||ETRACS Monthly Pay 2x Leveraged Dow Jones Select Dividend Index ETN||5.72%||$2.08|
|HILO||Low Volatility Emerging Market Dividend ETF||4.67%||$0.83|
|LVL||S&P Global Dividend Opportunities Index ETF||4.19%||$0.51|
The Bottom Line
There is a wide range of dividend ETFs available, which makes it simple to invest in this popular market segment. A higher yield than what’s typically available in money markets is one of the primary advantages of dividend ETFs, but it’s also important to consider risk, diversification and dividend consistency when choosing your ETF investments. Finding the right dividend ETF, or combination of ETFs, will depend on your personal situation and financial goals. With 61 dividend ETFs currently available, there is something for everyone, from the person seeking consistent yield with little volatility, to the person seeking high yield, high volatility and everything in between.
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Disclosure: No positions at time of writing.
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