Consider these funds to hedge against low interest rates.
During periods of low interest rates, income generated from dividends becomes more attractive to investors seeking safer places to park their investments. Dividend mutual funds and exchange-traded funds are advantageous in this environment. As the yield from bonds remains extremely low, dividend-producing stocks offer alternatives to investing in cash generating securities, says Derek Horstmeyer, a finance professor at George Mason University. The addition of dividend funds to a portfolio could give investors some downside protection since valuations in the stock market remain very high, he says. Here are six high-dividend mutual funds and ETFs to consider for your portfolio.
Invesco S&P Ultra Dividend Revenue ETF (ticker: RDIV)
The Invesco S&P Ultra Dividend Revenue ETF is a large-cap ETF that is based on the S&P 900 Dividend Revenue-Weighted Index. U.S. dividend ETFs were “relatively popular in the first half of 2021 as investors sought equity income through diversified portfolios,” says Todd Rosenbluth, director of mutual fund and ETF research at CFRA Research, a New York financial research company. “Invesco S&P Ultra Dividend Revenue ETF and SPDR Portfolio S&P 500 High Dividend ETF (SPYD) were among the other first-half top performers,” he says. “RDIV provides multicap dividend exposure and seeks to avoid value traps. The ETF uses a multistep process to narrow the S&P 500 and S&P MidCap 400 indexes to 60 stocks.” The fund has a year-to-date return of 21%, a one-year return of 51% and a three-year return of 5%.
Schwab U.S. Dividend Equity ETF (SCHD)
The Schwab U.S. Dividend Equity ETF outperformed the S&P 500 Index through June. The ETF contains companies that have consistent records of dividend growth and strong fundamentals. “U.S. dividend and fundamentally constructed ETFs added $28 billion in the first half of 2021,” Rosenbluth says. “Unlike in 2020, when companies were regularly suspending dividend programs, investors sought out equity income generation in 2021.” This ETF received $6.5 billion of new money through the first half of 2021, and investors “were rewarded as SCHD’s 20% first half gain outpaced the S&P 500’s 15%,” he says. “We continue to find SCHD attractive along with other strong-performing U.S. dividend ETFs worthy of attention.” The fund has a year-to-date return of 21%, a one-year return of 41% and a three-year return of 17%.
SPDR Portfolio S&P 500 High Dividend ETF (SPYD)
The SPDR Portfolio S&P 500 High Dividend ETF is a high-yield version of the S&P 500 Index. The $4.7 billion ETF owns the 80 highest dividend-yielding stocks in the broader benchmark, and this has “resulted in a value tilt,” Rosenbluth says. “Relative to the SPDR S&P 500 ETF Trust (SPY), this ETF has a greater exposure to financials (23% of assets versus 11%), real estate (20% versus 2.6%) and energy (14% versus 2.9%), and less in information technology (6.5% versus 27%) and consumer discretionary (3.8% versus 12%),” he says. The ETF provides a 4% dividend yield, which is nearly triple SPY’s. The fund has a year-to-date return of 23%, a one-year return of 49% and a three-year return of 7%.
Vanguard High Dividend Yield ETF (VYM)
The Vanguard High Dividend Yield ETF is a passively managed ETF that tracks the FTSE High Dividend Yield Index. The top holdings include JPMorgan Chase & Co. (JPM), Johnson & Johnson (JNJ) and Home Depot Inc. (HD). This ETF holds 412 stocks, emphasizes income and is broadly diversified. The fund has moderate to aggressive risk and is appropriate for investors with longer investment horizons. Dividend mutual funds and ETFs are attractive to investors because dividends are reinvested, says Stuart Michelson, a finance professor at Stetson University in Florida. The one-year return is 33%, and the three-year return is 10%.
Fidelity Dividend Growth Fund (FDGFX)
The Fidelity Dividend Growth Fund is a large-cap diversified domestic equity fund and invests in high-quality stocks. Zach Turner started managing the portfolio in July 2020, although FDGFX is more than 25 years old. The fund’s top holdings include Microsoft Corp. (MSFT), Wells Fargo & Co. (WFC) and Visa Inc. (V). Stocks that provide dividends can complement fixed-income assets while also generating the possibility for capital appreciation, says Michael Underhill, chief investment officer of Capital Innovations. The expense ratio is slightly higher at 0.49% since it is an actively managed fund. The fund has a year-to-date return of 20%, a one-year return of 40% and a three-year return of 12%.
Vanguard Real Estate ETF (VNQ)
The Vanguard Real Estate ETF invests in the stocks that are issued by real estate investment trusts, known as REITs — companies that purchase industrial and office buildings, hotels and other property. VNQ is weighted about 38% toward specialized REITs, but also has significant portions of its portfolio allocated toward industrial, health care and residential REITs. The top four holdings as of July 31 were the Vanguard Real Estate II Index Fund, American Tower Corp. (AMT), Prologis Inc. (PLD) and Crown Castle International Corp. (CCI). The expense ratio is 0.12% and the fund generates a 2.2% dividend yield. Real estate investments are often more volatile than other sectors, and investors who focus on adding funds with the highest dividend yields could be increasing their risk, Michelson says. The fund has a one-year return of 38%, a three-year return of 13% and a five-year return of 9%.
Best high-dividend mutual funds and ETFs:
— Invesco S&P Ultra Dividend Revenue ETF (RDIV)
— Schwab U.S. Dividend Equity ETF (SCHD)
— SPDR Portfolio S&P 500 High Dividend ETF (SPYD)
— Vanguard High Dividend Yield ETF (VYM)
— Fidelity Dividend Growth Fund (FDGFX)
— Vanguard Real Estate ETF (VNQ)
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