With 172 or more dividend exchange-traded funds available in the U.S. market, the search for the best dividend ETF may be like looking for buried treasure in a thick jungle.
However, if you have the right map, you can narrow down the relevant field and find where “x” marks the spot. Said differently, if you know what you should be looking for, you can whittle down the list of ETFs, as identified by ETF.com, and focus on the best of the best that will help you achieve your goal as a dividend investor.
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This article is an attempt to provide you with such a map:
— Surveying the dividend ETF landscape.
— How to find the best dividend ETFs.
— The best dividend ETF for your goals.
— What is the best dividend ETF to own?
Surveying the Dividend ETF Landscape
Let’s start with a survey of the land. A cursory look through the list of dividend ETFs shows that there are different types that can be classified into the following:
U.S. general (or total market) dividend ETFs. These are dividend ETFs that include dividend stocks across the entire U.S. market without regard to their market capitalization. All that matters is that these companies pay dividends and have been doing it for a while. An example is the iShares Core Dividend Growth ETF (ticker: DGRO).
U.S. market cap-specific dividend ETFs. As the name implies, these dividend ETFs only include stocks with a specific market cap — large cap, mid cap or small cap. An example of a large-cap dividend ETF is the Invesco S&P 500 High Dividend Low Volatility ETF (SPHD). ALPS O’Shares U.S. Small-Cap Quality Dividend ETF (OUSM) is an example of a small-cap dividend ETF, while WisdomTree U.S. MidCap Dividend Fund (DON) is an example of a mid-cap dividend ETF.
Performance-based dividend ETFs. These are dividend ETFs that only include companies that have attained a certain level of performance. The most common are high-yield dividend ETFs that require an above-average dividend yield for inclusion and dividend aristocrats ETFs that include only S&P 500 companies with at least a $3 billion market cap and that have increased dividends every year for at least 25 years. From the list, iShares Core High Dividend ETF (HDV) is an example of the former, and ALPS Sector Dividend Dogs ETF (SDOG) is an example of the latter.
Sector-specific dividend ETFs. These are dividend ETFs that focus on dividend stocks within a particular sector. For example, Invesco KBW High Dividend Yield Financial ETF (KBWD) only selects dividend stocks in the financial sector, while ProShares S&P Technology Dividend Aristocrats ETF (TDV) focuses on dividend aristocrats in the information technology sector.
International dividend ETFs. Some of these, like iShares International Select Dividend ETF (IDV), target developed markets (excluding the U.S.). Some, like iShares Emerging Markets Dividend ETF (DVYE), concentrate on emerging markets, while others, like Capital Group Dividend Growers ETF (CGDG), combine both.
Many international dividend ETFs also filter for dividend stocks based on market cap, sector and performance. Fidelity High Dividend ETF (FDVV) selects dividend stocks in developed markets with high dividend yield, First Trust Nasdaq Technology Dividend Index Fund (TDIV) focuses on global dividend stocks in the IT sector, and Harbor Dividend Growth Leaders ETF (GDIV) selects large-cap dividend stocks in developed markets.
How to Find the Best Dividend ETFs
Dividend investors vary in their goals and objectives. For some, having as high an income as possible is the primary objective. However, for others, the purpose of dividends is to reinvest for higher total returns. We can even identify a third group that only invests in dividend stocks because of the stability and quality of the businesses that typically pay dividends.
Nevertheless, every dividend investor will consider at least one of the following factors:
Dividend yield. The dividend yield is the annual dividends paid by a company divided by its market price. It is the metric that dividend investors use most to evaluate dividend stocks. However, it is worth noting that dividend yield can increase due to falling stock prices. Therefore, you should use the metric cautiously.
Dividend consistency and growth. A company can pay high dividends in a year or two and then fail to pay for a long period. This is why you should focus on dividend consistency and growth (how often and by how much a company is growing its dividend payout ratio) in addition to dividend yield.
Performance (capital appreciation). If you are more concerned about total returns, then dividend yield needs to be considered alongside capital appreciation. If the dividend yield is high but the ETF’s return is very low, the compounding effect may not yield much.
Expense ratio. The lower the ETF’s expense ratio, the greater the percentage of total returns that will be distributed to you and other investors.
Risk profile. As mentioned above, some investors will choose a dividend ETF because of its ability to lower their portfolio risk. In this case, the risk profile of the ETF matters a great deal.
Daily and average volume. If you are the type of investor who will keep shopping around for a better dividend ETF instead of holding one for many years, then you are better off going for ETFs with solid volume. High volume will ensure that you can sell the ETF quickly.
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The Best Dividend ETF for Your Goals
As different dividend investors have a variety of goals, it is better to approach this section with each of these investor types in mind:
Best Dividend ETFs for Regular Income
For dividend investors whose priority is to maximize the regular income they receive, dividend yield, dividend consistency and growth, and expense ratio may be the most important factors to consider.
Regarding dividend yield, you can filter for high-dividend-yield ETFs, since these have above-average dividend yields. Some of the most popular high-dividend-yield ETFs include:
— Vanguard International High Dividend Yield ETF (VYMI)
— Invesco S&P SmallCap High Dividend Low Volatility ETF (XSHD)
— Global X SuperDividend U.S. ETF (DIV)
— SPDR Portfolio S&P 500 High Dividend ETF (SPYD)
— ALPS Sector Dividend Dogs ETF (SDOG)
— Invesco S&P Ultra Dividend Revenue ETF (RDIV)
— WisdomTree U.S. High Dividend Fund (DHS)
You could also select dividend ETFs by sector: Financials, utilities and technology have the highest average dividend yield, according to Dividend.com. Looking for high-dividend-yield ETFs by focusing on these sectors can be an appropriate way to find the best deals based on income.
Best Dividend ETFs for Consistency and Growth
What about dividend consistency and growth? For this, you can filter for large-cap dividend ETFs or dividend aristocrats ETFs. Large-cap stocks tend to pay dividends more consistently, while dividend aristocrats have shown a history of both dividend consistency and growth.
Some examples of the top large-cap and dividend aristocrats ETFs include:
— WisdomTree U.S. LargeCap Dividend ETF (DLN)
— ProShares S&P 500 Dividend Aristocrats ETF (NOBL)
— ALPS Sector Dividend Dogs ETF (SDOG)
— SPDR Portfolio S&P 500 ETF (SPLG)
— Schwab US Dividend Equity ETF (SCHD)
— iShares Core S&P U.S. Value ETF (IUSV)
Best Dividend ETFs for Low Fees
The final factor is the expense ratio
. Typically, the expense ratios of top and popular ETF providers like Vanguard, Schwab, BlackRock and State Street tend to be the lowest. Some of the dividend ETFs with the lowest expense ratios are:
— Vanguard Dividend Appreciation ETF (VIG)
— Schwab U.S. Dividend Equity ETF (SCHD)
— Vanguard High Dividend Yield ETF (VYM)
— iShares Core Dividend Growth ETF (DGRO)
Best Dividend ETFs for Total Returns
If total return rather than income is your priority (because you typically reinvest the income for compound interest), then you want both a high dividend yield and decent capital appreciation.
You can do this in two ways. First, filter for dividend ETFs with high dividend yield and then rank them based on their performance (one-year, five-year or 10-year returns, depending on your investing horizon). Or, you can filter for dividend ETFs with the best returns based on your investing horizon and then select the ones with high dividend yields.
Using the first method, if you select the high-yield-dividend ETFs listed above and check their five-year performance, then their ranking, at the time of this writing, is as follows:
— ALPS Sector Dividend Dogs ETF (SDOG)
— Invesco S&P Ultra Dividend Revenue ETF (RDIV)
— WisdomTree U.S. High Dividend Fund (DHS)
— SPDR Portfolio S&P 500 High Dividend ETF (SPYD)
— Vanguard International High Dividend Yield ETF (VYMI)
— Global X SuperDividend U.S. ETF (DIV)
— Invesco S&P SmallCap High Dividend Low Volatility ETF (XSHD)
Best Dividend ETFs for a Low Risk Profile
If your goal is to use dividend ETFs to reduce your portfolio risk, then the risk profile of the ETF will be of the utmost consideration.
Because they are stable and quality businesses, large-cap companies tend to be less volatile and are more likely to produce consistent performance. Thus, focusing on large-cap dividend ETFs as well as dividend aristocrats ETFs may be the way to go.
Since diversification is a good way to reduce risk, you can also include some international dividend aristocrats and large-cap dividend ETFs (preferably in developed markets because emerging-market stocks are more volatile).
Some of the more popular ones include:
— Invesco International Dividend Achievers ETF (PID)
— Harbor Dividend Growth Leaders ETF (GDIV)
— ALPS O’Shares Europe Quality Dividend ETF (OEUR)
What Is the Best Dividend ETF to Own?
Here are one or two personal recommendations for each dividend investor type based on everything we have discussed above:
Income-oriented investor. Invesco S&P SmallCap High Dividend Low Volatility ETF (XSHD) or Global X SuperDividend U.S. ETF (DIV).
Total returns-oriented investor. ALPS Sector Dividend Dogs ETF (SDOG) or Invesco S&P Ultra Dividend Revenue ETF (RDIV).
Risk-minimizing investor. Schwab U.S. Dividend Equity ETF (SCHD) or SPDR Portfolio S&P 500 ETF (SPLG).
However, note that these recommendations are based on the available data at the time of writing. New data in a year’s time, for example, may alter this lineup.
The most important takeaway is understanding what you should be looking for based on the type of dividend investor you are. With that understanding, you can research current data and then choose the dividend ETF that is most appropriate for your personal and financial situation.
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What Is the Best Dividend ETF to Own? originally appeared on usnews.com
