If I had $1,000 to invest in a single dividend ETF right now, I wouldn't choose one solely for its high yield. I'd be looking more for total return -- a combination of income today and the potential for long-term growth. And I want enough exposure to growing companies to keep building wealth for years to come.
That's why the Fidelity High Dividend ETF (FDVV -0.64%) would be my current choice.
Since its inception a decade ago, this fund has produced an average annual return of 13.5%. While its current dividend yield of 2.6% isn't necessarily the highest you can find in this category, it's still roughly 2.5 times that of the S&P 500 (^GSPC +0.17%). Plus, its overall combination of growth and income positions it as an above-average long-term holding.
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FDVV looks for more than just a big dividend yield
The Fidelity High Dividend ETF's underlying index doesn't simply look for high-yielding stocks.
Dividend yield accounts for 70% of the selection process criteria's weighting, while the payout ratio and dividend growth rate each account for 15%. That means dividend quality and dividend growth are considered when building the portfolio.
From there, the selection process gets a little complicated. Much of a stock's weight in the portfolio is anchored to its market cap. That's why Nvidia is the fund's top holding, with a 7.3% weighting, despite paying only around 0.5% yield.
While the portfolio construction process ultimately creates a portfolio that's a bit counterintuitive, there are a couple of things I like about it:
- High yield is a heavy component of the selection criteria, which helps the fund offer an above-average dividend yield.
- The market cap bias enhances the fund's growth profile, giving it a "growth plus income" balance that few other dividend ETFs offer.
NYSEMKT: FDVV
Key Data Points
The economy plays into FDVV's strengths
The economic picture is still mixed, but it's unquestionably supported by strong corporate earnings growth. Jobs are being added at an inconsistent rate. Inflation and oil prices are high. The Fed just hiked interest rates by a quarter-point and signaled another rate hike could come before the end of the year.
But corporate earnings in the U.S. are expected to keep growing at a healthy clip. Much of this is driven by the artificial intelligence (AI) development boom, but we're seeing profits grow across companies of all sizes. As long as earnings are growing at double-digit rates, the path to higher stock prices should be well supported.
Because the Fidelity High Dividend ETF's portfolio is more heavily tilted toward growth companies, it could experience above-average gains. And that's why I think it's a strong buy candidate right now.
