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Dividend ETFs Under the Microscope


Dividend exchange traded funds have sucked in over $10 billion so far this year but now some winners and losers are starting emerge in this red-hot and developing ETF sector.

For example, the two most popular dividend ETFs in 2012 are WisdomTree Emerging Markets Equity Income (DEM) and Vanguard Dividend Appreciation (VIG).

The oldest ETF in the category is iShares Dow Jones Select Dividend Index Fund (DVY) , but the Vanguard fund VIG has surpassed it in total assets.

Also, DVY places only fifth on the list of best-selling dividend ETFs this year. [The 10 Top-Selling Dividend ETFs of 2012]

“Dividend-focused exchange traded funds that offer a decent yield and instant diversification have been wildly popular in recent years, thanks to the paltry yields in fixed income. To satisfy investor demand, ETF providers have launched a slew of new products,” says Morningstar analyst Michael Rawson.

“Many of these ETFs offer more intelligent designs than the first generation of dividend-focused ETFs. The improvement in structure is in response to some flaws in some of these older ETFs,” he wrote in a recent commentary on what he dubs Dividend ETFs 2.0.

Some of the other largest dividend ETFs include iShares High Dividend Equity Fund (HDV), SPDR S&P Dividend ETF (SDY), Vanguard High Dividend Yield Index Fund (VYM), WisdomTree Dividend Top 100 Fund (DTN), PowerShares International Dividend Achievers (PID) and First Trust Morningstar Dividend Leaders (FDL).

“In the current economic environment, we are concerned that the popularity of the highest-yielding dividend strategies has caused these stocks to become overpriced,” Rawson says. “On the positive side for dividend-paying stocks, dividend payout ratios are currently around 30%, much lower than the historical average of about 58%. This suggests a margin of safety should we enter a recession.”

These are the dividend ETFs that the Morningstar analyst categorizes as best of “the old guard”:

  • Vanguard Dividend Appreciation ETF (VIG)
  • Vanguard High Dividend Yield (VYM)
  • WisdomTree Total Dividend (DTD)
  • SPDR S&P Dividend (SDY)
  • First Trust Value Line Dividend Index (FVD)

These are dividend ETFs Morningstar doesn’t much care for that use a weighting system other than market cap:

  • PowerShares Hi-Yield Equity Dividend Achievers (PEY)
  • iShares Dow Jones Select Dividend Index (DVY)

Finally, Rawson says the “jury is still” out on these dividend ETFs in the new guard:

  • iShares High Dividend Equity (HDV)
  • PowerShares S&P 500 Low Volatility (SPLV)
  • PowerShares S&P 500 High Dividend Portfolio (SPHD)
  • Schwab U.S. Dividend Equity ETF (SCHD)
  • ALPS Sector Dividend Dogs (SDOG)

Full disclosure: Tom Lydon’s clients own DVY.

The opinions and forecasts expressed herein are solely those of John Spence, 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.