Exchange-traded funds (ETFs) designed to generate dividend income have become more popular in this market cycle as investors seek investments that can balance out the losses in their portfolios. Dividend-focused ETFs can provide income if you decide to take the distributions, but they can also boost the total return of the ETF when they are reinvested.
An added benefit of income-focused ETFs right now is that they are typically generating higher returns than other types of equity investments, mainly because they invest in large, stable companies that are able to weather the volatility better than most. These two ETFs share that dual benefit of generating solid dividend income and producing market-beating returns.
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iShares Core High Dividend ETF
The iShares Core High Dividend ETF (HDV 0.19%) tracks an index comprising high-yield dividend stocks -- the Morningstar Dividend Yield Focus Index. It contains stocks that generate high yields while also meeting screens for company quality and financial health. The portfolio consists of 75 stocks, most of them large-cap value names.
The three largest holdings are ExxonMobil (7.1%), Johnson & Johnson (6.7%), and Verizon (6.0%). About 23.6% of the portfolio is in healthcare-sector stocks, while 18.4% is in energy, and 16.6% is in consumer staples.
The ETF has a 12-month trailing yield of 3.12% and recently paid out a distribution of $0.57 in June. Over the past 12 months, it has paid out $3.15 per share in dividends. As for returns, it is essentially flat year to date and up roughly 5% over the past year, outperforming the S&P 500 in both instances. And June was a rough month, bringing down the fund's return.
NYSEMKT: HDV
Key Data Points
Through May 31, it boasted a five-year annualized total return of 9.2% and a 10-year annualized return of 10.6%. It also has a low 0.08% expense ratio.
Pacer Global Cash Cows Dividend ETF
The Pacer Global Cash Cows Dividend ETF (GCOW +0.07%) tracks an index called the Pacer Global Cash Cows High Dividend 100 Index. The index is comprised of stocks that meet two screens overlying the FTSE Developed Large-Cap Index, which includes 1,000 stocks.
First, it screens for the companies with the highest free cash yields. Free cash flow is the cash a company has after covering its operating expenses and capital expenditures. The higher its free cash flow, the better off a company is to pay a consistent dividend. Then, from those companies, it screens for the ones with the highest dividend yields.
The index, and thus the ETF, consists of the 100 stocks that best meet these screens, weighted by their dividend yields. Currently, the three largest holdings in the portfolio are AbbVie (2.3%), GlaxoSmithKline (2.2%), and AT&T (2.2%). The largest sector is materials at 19.5%, followed by healthcare at 17.6% and energy at 17.5%.
NYSEMKT: GCOW
Key Data Points
It has a 12-month trailing yield of 4.38% and paid out a distribution of $0.29 in June. Over the past 12 months, it has paid out $1.45 per share in dividends. The share price is down about 2% year to date and is down about the same over the past 12 months. But as of May 31, it had a five-year annualized return of 7.7%. The expense ratio is slightly higher than the iShares ETF at 0.60%.
These are two of the best-performing broad-market dividend ETFs out there. Given their focus on stable companies with an abundance of cash, they should be able to navigate any choppy seas ahead.
