It's no big secret that dividend-paying stocks tend to do better over the long run than their non-dividend counterparts, and also tend to perform better during tough economic times. If you're not comfortable picking individual stocks, as many investors aren't, there are some great ETFs available that can make dividend stocks a part of your portfolio. Two of the biggest dividend stock ETFs are the Vanguard High Dividend Yield ETF (VYM 0.87%) and the SPDR S&P Dividend ETF (SDY 0.73%). Here's a little about each, and which could be the best buy for you.
The Vanguard High Dividend Yield ETF
The Vanguard High Dividend Yield ETF tracks the performance of the FTSE High Dividend Yield Index, which includes 412 stocks that pay higher-than-average dividend yields, specifically excluding REITs. The fund's current dividend yield is 2.9% as of this writing, and here's a look at its 10 largest holdings:
|
Company |
Dividend Yield |
% of Fund's Assets |
|---|---|---|
|
Microsoft |
2.45% |
5.1% |
|
ExxonMobil |
3.59% |
4.1% |
|
Johnson & Johnson |
2.82% |
3.5% |
|
JPMorgan Chase |
2.20% |
3.4% |
|
General Electric |
3.23% |
3.1% |
|
Wells Fargo |
2.65% |
3% |
|
AT&T |
4.75% |
2.9% |
|
Procter & Gamble |
3.06% |
2.5% |
|
Chevron |
3.80% |
2.4% |
|
Verizon |
4.76% |
2.4% |
Source: Vanguard. Dividend yields are current as of 2/6/17.
The fund has $24.3 billion of total assets, and charges a rock-bottom 0.09% expense ratio. Over the past 10 years, the annualized average total return of the fund is 7.14%.
Image Source: Getty Images.
The SPDR S&P Dividend ETF
The SPDR S&P Dividend ETF seeks to track the performance of the S&P High Yield Dividend Aristocrats Index, which consists of the highest-yielding stocks on the S&P Composite 1500 index that have increased their dividends for at least 20 consecutive years.
The fund holds just 112 stocks, just over one-fourth of the Vanguard fund, and pays a 3.2% dividend yield as of this writing, but interestingly, the holdings are more spread out. If you look at the chart of the fund's top 10 holdings, you'll notice that no single stock makes up more than 1.9% of the total assets.
|
Company |
Dividend Yield |
% of Fund's Assets |
|---|---|---|
|
AT&T |
4.75% |
1.9% |
|
Old Republic International |
3.57% |
1.7% |
|
Realty Income |
4.22% |
1.7% |
|
AbbVie |
4.22% |
1.7% |
|
National Retail Properties |
4.23% |
1.6% |
|
Consolidated Edison |
3.72% |
1.5% |
|
Chevron |
3.80% |
1.5% |
|
People's United Financial |
3.60% |
1.4% |
|
Emerson Electric |
3.22% |
1.4% |
|
IBM |
3.19% |
1.4% |
Source: SPDR. Dividend yields are current as of 2/6/17.
You'll also notice that while there is some overlap (AT&T and Chevron) between the funds' largest holdings, they are not as similar in composition as you may think. These are two funds with a similar objective (higher-than-average dividends) that take significantly different approaches to achieve it.
As far as expenses go, the SPDR fund charges a 0.35% expense ratio, and has just over $15 billion in assets as of this writing. Over the past 10 years, the SPDR fund's annualized average total return has been 7.74%.
Key differences
To recap, here are some of the major differences between these two ETFs that investors should be aware of:
- At just 0.09%, the Vanguard High Dividend Yield ETF's expense ratio is about one-fourth of the SPDR S&P Dividend ETF's, although I wouldn't call either of them excessive.
- The Vanguard High Dividend Yield ETF's benchmark index excludes REITs, while REITs are a big part of the SPDR S&P Dividend ETF. In fact, two of the top 10 holdings of the SPDR fund are REITs. REITs tend to pay higher dividends than other sectors, and could be a primary reason why the SPDR fund's yield is higher.
- While the SPDR S&P Dividend ETF has far fewer stocks, it is much less reliant on any single company. For example, a big drop in the stock price of Microsoft or ExxonMobil would have a larger impact on the Vanguard High Dividend Yield ETF than a drop in AT&T or Old Republic would have on the SPDR fund.
- The Vanguard High Dividend Yield ETF's benchmark only takes dividend yield into account. On the other hand, inclusion in the SPDR S&P Dividend ETF requires a two-decade history of reliable dividend growth. This is a big difference, and is the main reason why there is barely any overlap between the funds' largest holdings.
Which is the better choice for you?
Although the Vanguard ETF has a lower expense ratio, I prefer the SPDR because of the differences listed above. I'm a big fan of REITs for long-term dividend growth, I like the SPDR fund's lower reliance on its top holdings, and the fact that every single one of the SPDR fund's stocks have increased their dividend for at least 20 years in a row gives me confidence that the income generated by the fund will continue to grow.
Having said that, these are both great ETFs for dividend-seeking investors, and as you can see, both have delivered comparable performance over the past decade.
