Income investors love to have dividend stocks in their portfolios. Dividends deliver returns through a down market and allow investors to avoid locking in losses by liquidating down positions. The liquidity, tax efficiency, and diversification provided by exchange-traded funds (ETFs) have made them among the most popular financial vehicles, so there's a substantial appetite for ETFs that can deliver the benefits of strong dividend stocks.
This article picks through the ETF universe to identify 10 different ETFs with different exposures and methodologies. They all bring fantastic characteristics to the table in the form of healthy distribution yields, reasonable fees, satisfactory valuation, and ample liquidity.
The most important metrics for analyzing dividend ETFs
Distribution yield represents trailing 12-month distributions to shareholders divided by the fund's net asset value (NAV). This measures the cash flow moving to shareholders, much like stocks' dividend yields. Investors should be aware that distribution yields are different from dividend yields, but distributions from dividend-focused ETFs should correlate to fund dividend income over the long term. The current S&P 500 weighted average dividend yield is around 1.7% and has hovered around 2% in recent periods, so this list identifies ETFs with distribution yields exceeding that level.
Investors avoid high expense ratios, because these reduce returns. Inefficient or over-priced management incurs losses that compound over the long term. However, some fund managers justify higher expense ratios by adding unique value, so funds with proprietary, specialized, or complex methodology have predictably higher expenses. The average ETF expense ratio is around 0.45%, so this is a useful benchmark to avoid excessive fees.
Liquidity is an important characteristic for any holding. Narrow bid-ask spreads reduce transaction costs and make it relatively easy to purchase investments near a given market spot price. Active markets also ensure that investors will be able to exit a position promptly at a reasonable price. Established ETFs with high assets under management (AUM) and sufficiently high average daily volume (ADV) should meet the basic needs for reputation, management quality, efficiency of scale, and liquidity.
Finally, ETFs trade on a secondary market just like stocks, so it is important to analyze valuation ratios such as price-to-earnings (P/E) and price-to-book (P/B) for the portfolio's underlying investments. Relative valuation metrics vary among factors such as industry, company size, growth outlook, and geography, but a general rule is that diversified portfolios with higher valuation ratios carry more downside risk. Dividend investors likely want to ensure that their ETF holdings have reasonable valuation metrics to avoid excess volatility.
With all those factors in mind, below is a list of 10 ETFs that satisfy the above criteria, with different features highlighted for different target niches.
|ETF||Distribution Yield||Expense Ratio||AUM||Avg. Daily Volume||P/E Ratio||P/B Ratio|
Vanguard High Dividend Yield (NYSEMKT:VYM)
Schwab US Dividend Equity (NYSEMKT:SCHD)
|iShares Select Dividend (NASDAQ:DVY)||4.25%||0.39%||$12.7B||$62M||22||1.44|
|iShares Core High Dividend (NYSEMKT:HDV)||4.22%||0.08%||$5.4B||$29M||37||2.40|
|WisdomTree Emerging Markets High Dividend (NYSEMKT:DEM)||5.18%||0.63%||$1.5B||$13M||10||0.91|
|iShares International Select Dividend (NYSEMKT:IDV)||6.97%||0.49%||$3.3B||$23M||18||1.07|
|First Trust Morningstar Dividend Leaders (NYSEMKT:FDL)||4.93%||0.45%||$1.3B||$7M||18||1.83|
|Vanguard Real Estate (NYSEMKT:VNQ)||3.61%||0.12%||$28.9B||$327M||60||2.47|
|Vanguard Global ex-U.S. Real Estate (NASDAQ:VNQI)||7.39%||0.12%||$4.5B||$23M||16||0.88|
|iShares Global REIT (NYSEMKT:REET)||5.90%||0.14%||$2.2B||$11M||47||1.35|
Great options in different flavors
The Vanguard High Dividend Yield ETF (VYM) is an efficient, established fund that provides exposure to the FTSE High Dividend Yield Index with excellent liquidity and low expenses. It covers a broad range of stocks with no real estate investment trust (REIT) exposure and is a great, straightforward option for dividend investors.
The Schwab U.S. Dividend Equity ETF (SCHD) offers similar benefits to VYM, but is U.S.-focused and carries more exposure to large-cap companies. This is a great alternative for investors with specific geographical targets. The iShares Select Dividend ETF (DVY) tracks the same index as SCHD, but a more complex selection methodology results in superior recent distribution as well as higher expenses. Investors who want a more hands-on approach to improve upon SCHD could consider DVY.
Investors who expect a more rigorous investment process can turn to the iShares Core High Dividend ETF (HDV), which is designed to track the Morningstar Dividend Yield Focus Total Return index by subjecting stocks to multiple screens. The First Trust Morningstar Dividend Leaders Index Fund (FDL) employs a stricter version of a similar strategy that has generated strong results. This ETF excludes REITs and has heavy exposure to utilities and consumer cyclical.
Investors seeking international exposure should consider the WisdomTree Emerging Markets High Dividend Fund (DEM), which provides liquid exposure to a diversified high yield bundle with some mid-cap and sector concentration. If emerging markets sound unappealing, the iShares International Select Dividend ETF (IDV) is a suitable alternative that tracks a developed market dividend index that has delivered enticing yields. Investors will incur relatively high expenses for the specialized exposure offered in each of these funds.
These dividend ETFs all limit or eliminate REIT exposure, so investors targeting real estate should look at funds that specifically target cash flows from REITs. The Vanguard Real Estate ETF (VNQ) tracks the MSCI US IMI Real Estate 25/50 Index with a very reasonable expense ratio to provide broad U.S. real estate exposure, with a focus on the commercial segment and underweight specialized REITs. A similar strategy for international REITs is available with the Vanguard Global ex-U.S. Real Estate ETF (VNQI). Finally, a fund that blends the above exposures is available in the iShares Global REIT ETF (REET), which delivers liquidity at a very reasonable expense.