It’s OK to admit it: It’s more fun to watch your stock price rise than to research dividends.
But as savvy investors know, dividends account for a sizable slice of total market return. According to research from S&P Global, over the past 98 years, dividends represented about 32% of the return of the S&P 500 and its predecessor indexes.
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Although all investors need some growth assets in their portfolios, generating income becomes increasingly important in retirement.
Owning dividend exchange-traded funds, or ETFs, can simplify the investing process by offering instant diversification. That reduces the need for individual stock research and can minimize risks of poor-performing stocks.
Two of the largest fund companies, Vanguard and BlackRock, sponsor several dividend-focused ETFs, with BlackRock’s being marketed under the iShares umbrella.
Each fund and fund family has its own set of pros and cons.
“If an investor’s No. 1 desire is low cost when comparing these dividend ETFs, Vanguard has the lower cost by a smidge,” says Alyson Burkett, a certified financial planner at 21 Goats Financial Planning in Roswell, Georgia.
For those more interested in tracking returns, the iShares Core Dividend Growth ETF (ticker: DGRO) has been a top performer in recent years, she says, noting that past performance is no guarantee of a fund’s future returns.
Here’s how a handful of Vanguard and BlackRock/iShares dividend ETFs stack up as of Dec. 5:
| ETF | Expense Ratio | TTM Yield |
| Vanguard Dividend Appreciation ETF (VIG) | 0.06% | 1.7% |
| iShares Core Dividend Growth ETF (DGRO) | 0.08% | 2.1% |
| iShares Select Dividend ETF (DVY) | 0.38% | 3.3% |
| Vanguard High Dividend Yield ETF (VYM) | 0.06% | 2.7% |
| iShares Core High Dividend ETF (HDV) | 0.08% | 3.3% |
Vanguard Dividend Appreciation ETF (VIG)
The VIG ETF, with $88.5 billion in assets under management, fully replicates the S&P U.S. Dividend Growers Index with 338 holdings from nine S&P sectors.
The index measures performance of U.S. companies that have consistently increased dividends for at least 10 consecutive years. It excludes the top 25% highest-yielding eligible companies. That can ensure that the index tilts toward higher-quality, growth-oriented companies, potentially avoiding distressed companies.
Its trailing-12-month yield is 1.7%.
“This ETF has a very low annual management expense of 0.06% and is designed to provide dividend-producing stocks that are higher than the average yield of the S&P 500,” says Richard McWhorter, CFP, managing partner and private wealth advisor at SRM Private Wealth in Pasadena, California.
Top holdings include Apple Inc. (AAPL), Broadcom Inc. (AVGO), Microsoft Corp. (MSFT), JPMorgan Chase & Co. (JPM) and UnitedHealth Group Inc. (UNH).
The index’s method of screening, McWhorter says, creates a diversified portfolio of large-cap stocks with high dividend yields.
“We use this investment to provide a little bit of a defensive strategy while maintaining exposure to the large capital space,” he says.
iShares Core Dividend Growth ETF (DGRO)
The DGRO ETF measures the return of the 413-stock Morningstar U.S. Dividend Growth Index. Its trailing-12-month yield is 2.1%, reflecting greater inclusion of mid-cap and small-cap stocks, which often have higher risk profiles than large caps.
This index is constructed with stocks having a five-year history of increasing dividends, although it filters out those with a payout ratio of more than 75% and those in the top decile of dividend yield.
As with the VIG ETF, the aim is to include companies with sustainable dividends.
The focus on companies with a strong history of increasing dividends helps provide steady income while also positioning the portfolio for long-term growth, says Stephen Boatman, CFP, principal of Flat Fee Financial in Charlotte, North Carolina.
“Its emphasis on high-quality, dividend-growing stocks tends to make it more resilient during market downturns, as these companies are often financially stable,” he adds.
However, he notes, dividend-focused ETFs like DGRO may not offer the same level of capital appreciation as growth-oriented investments.
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iShares Select Dividend ETF (DVY)
This ETF is benchmarked to the Dow Jones U.S. Select Dividend Index. Its investable universe includes all dividend-paying companies in the Dow Jones U.S. Index with a five-year dividend-to-earnings-per-share ratio of less than 60%. Stocks must also have a three-month average daily trading volume of 200,000 shares.
It holds 98 stocks, and has an expense ratio of 0.38%. Its trailing-12-month yield is 3.3%. The fund emphasizes sectors like utilities and financials, which make up over 50% of its allocation.
“DVY has a higher expense ratio and fewer holdings than its peers, which might appeal to those seeking concentrated high-dividend exposure,” says Michael Martin, vice president of market strategy at TradingBlock in Chicago.
Martin adds that the ETF does a good job of closely tracking its benchmark index.
Vanguard High Dividend Yield ETF (VYM)
This ETF has similarities to its sister fund, VIG, McWhorter says. “For example, the same management expense of 0.06% is structured to produce a relatively higher dividend yield and was established six months after the VIG in 2006,” he says.
The two funds differ in some ways as well. VYM’s average market capitalization is $108.5 billion, versus VIG’s average of $197.4 billion. VYM’s lower market caps indicate the potential for a higher yield, and that’s exactly the case. VYM’s trailing-12-month yield is 2.7%.
It’s benchmarked to the FTSE High Dividend Yield Index, which tracks the stocks with the highest dividend yields, excluding real estate investment trusts, or REITs, which don’t currently benefit from favorable tax rates on qualified dividends.
Top holdings include Broadcom, JPMorgan Chase, Exxon Mobil Corp. (XOM), Procter & Gamble Co. (PG) and Home Depot Inc. (HD).
iShares Core High Dividend ETF (HDV)
This 75-stock ETF measures the performance of the Morningstar Dividend Yield Focus Index, which tracks a select group of U.S. stocks that have a consistent record of paying out relatively high dividend yields.
It tilts toward larger stocks, with large caps and Morningstar’s classification of “giant caps” making up more than three-quarters of the fund’s assets. The average market capitalization is $138.2 billion, higher than Morningstar’s average in the U.S. Large Value category.
This is an inexpensive ETF, with a management fee of just 0.08%. Its trailing-12-month yield is 3.3%.
Top holdings include Exxon Mobil, Chevron Corp. (CVX), Johnson & Johnson (JNJ), AbbVie Inc. (ABBV) and Philip Morris International Inc. (PM). As the top two holdings suggest, energy has the largest sector representation, at about 27%.
“It tracks its benchmark closely, and it is suitable for those seeking focused high-dividend exposure while maintaining low costs,” Martin says.
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ETF Dividends: Vanguard vs. BlackRock originally appeared on usnews.com
