Special Report: Surveying the Dividend ETF Landscape

June 1st at 8:00am by Tom Lydon

As more people shift assets around to invest toward their golden years, income-seeking investors are finding less opportunities in traditional fixed-income products. Yields in CDs, money market accounts and Treasury bonds are already at their record lows after investors piled into safe-haven assets on the heightened market volatility. Still, investors can find income opportunities in dividend exchange traded funds.

Dividend ETFs help provide investors with income-paying opportunities. They offer high yields by holding a basket of dividend-issuing stocks from both U.S. domestic and global stock markets. Typically, these funds will include a diversified range of highly liquid stocks with above-average dividend yields. Additionally, dividend ETFs may follow a specific guideline when selecting their component stocks. For instance, some may screen for specific quantitative qualities, including a history of increasing dividends or large and stable dividend payers.

Looking into Dividend Options

Income-generating ETFs have been among the most popular funds traded on the markets, with products like the Vanguard Dividend Appreciation ETF (NYSEArca: VIG), iShares Dow Jones Select Dividend Index Fund (NYSEArca: DVY) and SPDR S&P Dividend ETF (NYSEArca: SDY) attracting around $10 billion in assets each. Additionally, as the ETF universe continues to expand, ETF providers have come out with a collection of various dividend-related fund products that help investors diversify into various pockets of dividend producing assets and access different levels of yields. [Dissecting Vanguard’s Two Largest Dividend ETFs]

Vanguard Dividend Appreciation ETF. VIG has an expense ratio of 0.18% and a 12-month yield of 2.01%.
iShares Dow Jones Select Dividend Index Fund. DVY has an expense ratio of 0.40% and a 12-month yield of 3.33%.

SPDR S&P Dividend ETF. SDY has an expense ratio of 0.35% and a 12-month yield of 3.11%.

We also have other various dividend ETFs that promise “high dividend yields,” but like with most ETF investments, individuals should take the time to dive in and carefully look at what they are getting themselves into.

For instance, the Vanguard Dividend Appreciation ETF (VIG) and the Vanguard High Dividend Yield ETF (NYSEArca: VYM) track completely different strategies and they may be more conservative than you might think, as both may serve adequately as a core holding. VIG follows companies that have raised their dividends year-over-year, whereas VYM follows the highest-yielding third of the U.S. market, with high-quality, established firms dominating the space.

Some other dividend ETFs that follow their own proprietary methodology in selecting component stocks through set quantitative measurements include iShares High Dividend Equity ETF (NYSEArca: HDV), WisdomTree Dividend Top 100 Fund ETF (NYSEArca: DTN), and First Trust Morningstar Dividend Leaders Index (NYSEArca: FDL).

Investors, though, may also be interested in holding dividend ETFs based on asset class. You may want to take on a broad dividend market prospective through a fund like the WisdomTree Total Dividend Fund ETF (NYSEArca: DTD), but you could break down the market capitalizations, as well. For example, investors may take a look at the WisdomTree LargeCap Dividend Fund ETF (NYSEArca: DLN), WisdomTree MidCap Dividend Fund ETF (NYSEArca: DON) and WisdomTree Trust SmallCap Dividend Fund ETF (NYSEArca: DES).

International Dividend ETFs

If an investor would like more diversification, there is always the international dividend market. Potential investors may consider broad dividend options like the iShares Dow Jones International Select Dividend Index (NYSEArca: IDV), SPDR S&P International Dividend ETF (NYSEArca: DWX) or Powershares Intl Dividend Achievers ETF (NYSEArca: PID). For those who have been disenchanted with specific sectors, there are “ex-” dividend funds like the WisdomTree International International Dividend ex-Financials Fund (NYSEArca: DOO).

Again, if you believe in the growth potential of small-cap international picks, the WisdomTree Emerging Market SmallCap Fund ETF (NYSEArca: DGS) may suit your needs, or the more specialized WisdomTree International SmallCap Fund ETF (NYSEArca: DLS) could fit your objectives.

Foreign companies tend to offer higher yields than our domestic conglomerates, but the better payouts also come with higher risks. Large U.S. domestic companies are considered among the safest among the world but they come with low premiums to attract investors. On the other hand, the riskiest found in the emerging markets may generate much more enticing returns.

Risky, High-Yield Dividend Plays

Then, we have high-yield dividend ETFs like the Global X SuperDividend (NSYEArca: SDIV) and Guggenheim S&P Global Dividend Opportunities Index (NYSEArca: LVL) that follow high-yielding stocks of the world. While this seems like an enticing draw, these ETFs may include high-yield equity picks that provide unsustainable dividend payouts, which may lead to future random cuts. Additionally, the SDIV fund may also hold real estate investment trusts, which also help a boost yields, but REITs are not considered as qualified dividends.

The Dividend Landscape of Tomorrow

Currently, there are 402 dividend payers on the S&P 500, a 12-year high, and 122 companies have increased their dividends, with only three companies reducing dividends over the first quarter. Nevertheless, companies are still paying out a historically low level of their earnings to shareholders, which may leave room for more dividend payouts down the line.

The net debt of S&P 500 companies relative to EBITDA – earnings before interest, taxes, deprecation and amortization – is still two turns less than its trailing ten year average as a result of de-leveraging and de-risk following the financial crash.

Since the 2008 financial crisis, more companies have steadily increased dividend payments. For instance, Apple (NasdaqGS: AAPL), Agilent Technologies (NYSE: A), American Tower (NYSE: AMT), Coventry Health Care (NYSE: CVH), Gamestop (NYSE: ME), SAIC (NYSE: SAI) and Thermo Fisher Scientific (NYSE: TMO) are now offering payouts. Given the health of corporate balance sheets and the amount of extra cash on hand, companies may continue to increase dividend payments – S&P 500 companies are sitting on twice the amount of free cash they had five years ago.

Dividend Payers Are Still Stocks

While the high market volatility experienced in late 2011 helped contribute to the push into dividend stocks and ETFs, dividend payers are still stocks, which means dividend payers will also be subject to general macroeconomic trends in the global market. Dividend stocks will experience capital appreciation or depreciation along with the general equities market; however, they have the added benefit of a dividend buffer in the case of market depreciation. Nevertheless, dividend payers make a good compromise between risky equities and safer bond assets. [JC Penney a Reminder of Dividend ETF Risks]

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.