Dividend-Weighted ETFs and Your Investment Portfolio
Not all dividend-paying companies are an equally lucrative proposition, on account of differences in cash-flows and approach. While mature firms with large cash flows may offer a stable, conservative approach to dividend pay-outs, growth-oriented firms are another story. The latter have aggressive expansion plans and raise dividends, though they are also prone to volatility. If the best ETF with dividends is selected though, the investors benefit from the most efficient money management solution.
Researching and selecting the right stocks is a must. But ETFs must showcase transparency of strategies and knowledge about their holdings. Well-diversified ETFs with dividends additionally protect investors from putting their eggs in one basket and concentrating only on a single firm or sector.
An equally weighted portfolio of around 9 stocks delivers a considerable loss if one to 3 of these suffer a price decline. In contrast, dividend-oriented equity ETFs hold close to 30 stocks. Winners can offset losing trades easily. Consider this example. Two of the most popular yield-focused equity ETFs are Vanguard Total Stock Market ETF (VTI) and the SPDR S&P 500 ETF (SPY). While VTI has an expense ratio of 0.04%, SPY ranges around 0.09%.
Top 3 ETF Broker Comparison
Best ETFs for Income-Seekers
Not all ETFs offer market or strategy exposure to the same degree. This is more so while moving away from plain market-capitalisation-weighted exposures. Some dividend-screened equity ETFs may even focus on squeezing the highest payout possible. Others may have a more balanced approach, choosing companies offering a stable income as well as long-term capital growth. Although there are ETFs that rank well and provide a decent yield, there are those that only track stocks that rank those that reflect a promised yield.
No effort is made to evaluate the debt levels of companies or assess how they will remain profitable. This raises the problem of dividend traps. While the so-called best performing ETF may appear profitable, the truth is that a company may promise dividends it simply cannot afford. During the 2008 financial housing loan mortgage crisis, this came to be.
The ETF suffered heavy damages from holding stocks in US and EU banks that suspended high dividend payouts. The absence of sustainability screening makes this a bad choice for those seeking the best ETF with dividends that are stable. There are ETFs that track dividends over longer periods – some as long as ten years – and have consistently performed well. These are companies that offer stable dividend payouts, as against the promise of high returns that never materialise.
Consistency Versus Yield
An analysis by Morningstar reveals that companies in this ETF portfolio show lower debt and better profitability characteristics. But consistency comes at the expense of a lower yield. The SPDR ETF stands at 3.97%, for example, But for those looking for financial stability and the best performing ETF with dividends, the search ends here. Where passive funds are concerned, the strategy defining the index must be examined. Due diligence on these benchmarks should guide your fund selection.
While an investment in a high dividend-yielding stock gives your solid returns, regular income is also important. Dividends paid by economically strong and profitable companies present an attractive investment option. Within the EU and US, there are several suitable ETFs that can fit the bill. The largest US dividend ETF by fund size in the States is VTI, which is the Vanguard Total Stock Market ETF. The next portfolio group is iShares and their top performing ETF is iShares Select Dividend ETF (DVY). The third best ETF portfolio is seen in the case of SPDR S&P Dividend ETF (SDY).
But when it comes to the cheapest US dividend ETF by total expense ratio, the Schwab U.S. Broad Market ETF (SCHB) tops the rankings at 0.03%. Second is another Schwab, with the Schwab U.S. Large-Cap ETF (SCHX). iShares joins the podium in third place with the iShares Core S&P Total US Stock Market ETF (ITOT) also at 0.03%.
Best US ETFs with Dividends
- The WisdomTree US Quality Divident Growth Fund (DGRW) offers investors an impressive one-year return of around 26.77%. Although this is by no means indicative of future results, it does sit well with its investors as it managed an average volume of 143,874. The price is set at $41.70 and the annual dividend yield at a reasonable 1.69%.
- First Trust NASDAQ Rising Dividend Achievers ETF (RDVY) comes in at a low price of $30.15 and averages a volume of around 68,003. The one year return for this one was an unexpected 22.07% and currently, there is around $348 million in assets in this fund. The fee here is 0.50%. This is a tracker fund and tracks the NASDAQ US Rising Dividend Achievers Index.
- iShares Core Dividend Growth ETF (DGRO) forms part of asset holdings of around $2.61 billion. The fee is a remarkable 0.08% and investors enjoyed a one-year return of 22.41% at a price of 34.89%. The annual dividend yield is at 1.92% and this ETF invests in dividend-paying US equities.
How to Judge An ETF With Dividends
Different approaches these indices adopt result in different yields. Some ETFs are more diversified than others, and others may have more suitable fees. For some investors, the risk factors determine the ETF they decide to go with, as some portfolios reflect a tracked history of the entire group that makes up the individual ETF. The suitability of an investment product depends on the individual. Moreover, past performance does not guarantee results in the future. So how do you go about choosing the best ETF portfolio? Carry out asset allocation, geographic allocation and select the most appropriate ETF thereafter. Choose an ETF that gives you the exposure and diversification you seek. Investors should also establish if prospective ETF investments have certain tax benefits.
Assess the risk you want to take on and compare allocation relative to 100% global equity allocation. Avoid positioning yourself as a forced seller of assets at stressed valuations, and work out the income possible without limiting capital growth. Presently, while global equities yield 2.2%, US junk bonds are dropped by 0.1% as the market conditions tighten.
While the US market have fair yields relative to others, total returns lagged global equities over 5 and 10 year periods of late. Income investors, therefore, need to be realistic without limiting growth.
The Global Picture
For indices like the Dow Jones Global Select Dividend, stocks are ranked by indicated dividend yield and meet demands for dividend quality and liquidity within a year, as compared to the 5-year average. This ETF includes 100 stocks from only developed economies. The weight of individual companies is capped at 10%. The highest dividend stocks of developed and emerging economies worldwide are included in the FTSE All-World High Dividend ETF.
This index reflects the highest dividend yields for 50% of the global markets. With 1277 companies on board, this is the largest dividend index. This dividend index is weighted by the market cap of selected companies.
The S&P Global Dividend Aristocrats Index aims at sustainability and long-term dividend growth. Companies are included only if they meet the criteria of 10 consecutive years of controlled dividend policies with stable/increasing dividends. Pre-defined yield criteria must also be met. This dividend index trades stocks from developed and emerging countries, including 11,603 stocks in total. Comprehensive quality criteria are also the basis of the SG Global Quality Income Index. This is the index that considers dividend yield based on analyst consensus. Another feature is the equal weighting of all selected dividend stocks.
A Question of Dividend Cuts
One of the oldest contributors to the share mix that make up substantial ETF portfolios, is GE. While the dividend cuts alarmed investors, which has an effect on the overall shares. For investors, however, these cuts aren't as alarming as the biggest dividends tend to get paid out in the fourth quarter. Rising interest rates might have put investors off from purchasing dividend ETFs, however, the landscape changed slightly when over $1 billion went to a dividend ETF.
For international exposure, consider the DB X-trackers Stoxx Global Select 100 UCITS ETF. It has dividend paying companies from the STOXX Global 1800 Index with non-negative historical 5-year dividend per share growth rate. The dividend to EPS ratio is less or about 60 to 80% depending on the region. Invesco Powerhouse also offers ETFs that yield high dividends amid low volatility. Low-cost investing has seen fees fall and trading spreads narrow.
The top players in the field offer investors tight spreads, liquidity, and something different from conventional market cap weight index.
Moving Past Traditional Market Cap Indices
For those seeking a shift from traditional market cap indices, the XFEW ETF from Deutsche Bank or the DB X-Trackers FTSE Equal weights is a good option. This ETF gives each share in the FTSE Index a position of 1%. It also offers rebalancing every six months, taking away the concentration risk the FTSE 100 has at the top of the index. More exposure to smaller companies is its USP.
But it has an AUM/assets under management of $22.8 million that is small for big investors. The UBS ETF (IE) MSCI UK IMI Socially Responsible UCITS or UKSR ETF is perfect for those wary of oil and mining companies. Launched in 2014, this ETF has a low TER of 0.28%. More impressively, it outperformed FTSE All Shares by as much as 5.6% up to April 2017.
Moving past conventional forms of ETF investing is essential if investors seek to innovate, staying ahead of the markets and shifting economic conditions. Most ETFs with dividends either offer high payouts or higher sustainability than their peers. Your aim should be to choose an ETF with dividends that combines the best of both worlds.