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Largest Dividend ETFs Yielding Less than Treasury Bonds After Rate Spike


Some of the biggest ETFs in the popular dividend category are now yielding less than 10-year Treasury notes after the recent jump in interest rates.

Yields on the 10-year note climbed above 2.6% this week.

The largest dividend ETF, Vanguard Dividend Appreciation (VIG), currently pays a 30-day SEC yield of 2.11%, according to Vanguard. The fund holds $15.5 billion of assets.

Meanwhile, the $11.5 billion SPDR S&P Dividend ETF (SDY) has a 30-day SEC yield of 2.53%, according to State Street. SDY is the third-largest dividend ETF.

Yet not all dividend ETFs are yielding less than 10-year Treasuries. The $12.1 billion iShares Select Dividend ETF (DVY) is currently paying 3.63%, according to BlackRock.

Varying yields in dividend ETFs reflect the different methodologies baked into the funds’ tracking benchmarks. Investors should be comfortable with how a dividend ETF works before buying in.

For example, some of the ETFs weight individual stocks by dividend yield, while others weight companies by their market cap. These seemingly small wrinkles can result in different yields and performance.

Some investors might be surprised to learn their dividend ETFs are paying out less than Treasury bonds. Of course, comparing the yields of stock ETFs and individual bonds isn’t exactly fair because the asset classes have different risk profiles and volatility levels. Still, it’s been a long time since 10-year Treasury notes have paid more than dividend ETFs in a low-rate environment. Some investors have looked beyond fixed-income markets to boost yield, including equity-based dividend ETFs.

Why are the dividend yields of VIG and SDY relatively low?

VIG, the Vanguard dividend ETF, focuses on firms that have raised dividends for at least 10 years straight, explains Morningstar analyst Samuel Lee.

“The fund’s index provider, Mergent, weeds out firms that fail its financial strength screens,” he writes in a profile of VIG. “Unfortunately, the exact methodology is secret but seems to focus on firms with lower leverage and ample cash flow. The result is quality rather than a high yield.”

In other words, the ETF is trading some yield for quality and stability.

Similarly, SDY holds companies that have raised their dividends every year for the past 20 years. The ETF weights individual stocks by their dividend yield.

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.