The ETF universe, once a beacon of simplicity and clarity for investors, has seen explosive growth in recent years.
While this expansion has ushered in a plethora of opportunities, it has also introduced an unexpected challenge: analysis paralysis. In the context of investments, this could mean potentially missing out on opportunities or making ill-informed decisions.
Dividend ETFs aptly illustrate this predicament. A quick glance at the ETF Central Screener reveals a staggering 151 dividend-focused options available to investors.
With names touting "high yield", "quality", and "growth", alongside factors like U.S. versus international exposure, active versus indexed strategies, and fundamentally weighted versus market cap weighted approaches, the landscape can appear as a maze to even seasoned investors.
The question then is, in this sea of choices, how does one pinpoint the right dividend ETF tailored to their needs?
To help prospective investors cut through the noise, I've put together a comprehensive guide, distilling the world of dividend ETFs into what I believe are the four primary categories: high-yield, quality, growth, and hybrid strategies.
To keep things short and affordable, we will also be sticking to U.S. equity offerings with reasonable expense ratios.
High-yield dividend ETFs
A high-yield dividend ETF is all about seeking out stocks that offer a higher-than-average yield relative to either their universe or a specified benchmark. The selection criteria might sound simple, but the methodologies employed can vary.
For some of these ETFs, the assessment hinges on historical yields. This means they look back at a specific timeframe to ascertain which stocks have consistently delivered robust yields.
Others might lean on forecasted yields, utilizing various predictive models to determine which stocks are poised to offer lucrative dividends in the foreseeable future.
And to further streamline the selection process, many ETFs impose a cut-off criterion — for instance, stocks might need to rank among the top half or quartile in terms of yield.
An essential point to emphasize here is the genuine pursuit of higher present income. These ETFs aren't artificially enhancing yields by using derivatives like some covered call funds might.
Now, while many of these funds might sport "high-yield" or "high-dividend" in their names, it's not a hard and fast rule. Be sure to read their factsheets closely.
Some of the most popular U.S. high-yield dividend ETFs include:
- Vanguard High Dividend Yield ETF (VYM): 0.06% expense ratio.
- Vanguard High Dividend Yield ETF (HDV): 0.06% expense ratio.
- SPDR Portfolio S&P 500 High Dividend ETF (SPYD): 0.07% expense ratio.
- WisdomTree US High Dividend Fund (DHS): 0.38% expense ratio.
Dividend Growth ETFs
Dividend Growth ETFs don't just look for stocks with the biggest dividends right now. Instead, they focus on stocks that have steadily increased their dividends over the years.
How do they pick these stocks? The methodologies differ, with some choosing stocks that have raised their dividends consistently over a set number of years. Others could look for those with a strong rate of dividend increases over time.
These ETFs come with various names. You might see labels like "dividend growth", "dividend appreciation", or "rising dividends". Then there's a special group called "dividend aristocrat" ETFs. These only pick stocks that have upped their dividends each year for at least 25 years.
Some of the most popular U.S. dividend growth ETFs include:
- Vanguard Dividend Appreciation ETF (VIG): 0.06% expense ratio.
- iShares Core Dividend Growth ETF (DGRO): 0.08% expense ratio.
- ProShares S&P 500 Dividend Aristocrats ETF (NOBL): 0.35% expense ratio.
- T. Rowe Price Dividend Growth ETF (TDVG): 0.50% expense ratio.
- Invesco Dividend Achievers ETF (PFM): 0.52% expense ratio.
Dividend Quality ETFs
Dividend quality ETFs take a different approach. Instead of focusing on big dividends right now or how consistently a stock has raised its dividends over the years, these ETFs look at how strong and reliable those dividends are.
Their screeners may assess things like how much of the profit a company uses to pay dividends (payout ratio), how much profit the company makes on its investments (return on equity), and how much cash a company has left after paying its bills (free cash flow) to name a few.
In many ways, these ETFs are a lot like other ETFs that focus on 'quality' companies. The difference? Dividend quality ETFs specifically zoom in on companies that pay dividends, while general quality ETFs might include companies that don't pay dividends at all.
Some of the most popular U.S. dividend quality ETFs include:
- FlexShares Quality Dividend Index Fund ETF (QDF): 0.38% expense ratio.
- ALPS O’Shares U.S. Quality Dividend ETF (OUSA): 0.48% expense ratio.
Hybrid Dividend ETFs
Hybrid dividend ETFs are like the Swiss Army knives of the dividend ETF world. Instead of just focusing on one thing, they mix and match different strategies to aim for the best results.
They might pull from the high-yield approach, mix in some dividend growth criteria, and then add a splash of dividend quality checks. Some of them may also weight holdings based on fundamental metrics other than market cap.
It's similar to how some funds use multiple factors, like value and momentum, to pick and weight their holdings. In the dividend ETF scene, these hybrid funds are essentially our version of those multifactor funds.
WisdomTree is a big name that’s known for this approach. One of their ETFs, the WisdomTree U.S. Quality Dividend Growth Fund (DGRW), has historically performed better than the S&P 500, despite charging a 0.28% expense ratio.
However, there's a small catch. Just looking at the name of these ETFs might not give you a full picture of what they're doing. Unlike some funds that say "high-yield" or "dividend growth" right in the name, hybrid funds can be a bit more mysterious.
So, if you're considering one, it’s important to take a deep dive into its factsheet and even its prospectus. That way, you'll get a clear idea of what's under the hood.
Some of the other most popular U.S. hybrid dividend ETFs aside from DGRW include:
- Schwab U.S. Dividend Equity ETF (NYSE:SCHD): 0.06% expense ratio.
- WisdomTree LargeCap Dividend Fund (DLN): 0.28% expense ratio.
- Invesco S&P 500 High Dividend Low Volatility ETF (SPHD): 0.30% expense ratio.
- SPDR S&P Dividend ETF (SDY): 0.35% expense ratio.
- WisdomTree U.S. MidCap Dividend Fund (DON): 038% expense ratio.
- WisdomTree U.S. SmallCap Dividend Fund (DES): 0.38% expense ratio.
This content was originally published by our partners at ETF Central.