“This also allows the fund to have one of the highest dividend yields – 3.75% – of the domestic funds we analyzed,” the strategist wrote.
The differences among dividend ETFs highlights the need for research before jumping into a fund. Sector allocations can have a big impact.
For example, in the energy sector there are “plenty of high-yielding names” but energy ETFs are down sharply this year.
“The volatility in energy commodity prices seems to put a question mark on oil company payouts, and those dividends get a discount to the more-certain income stream of utilities,” Colas said.
“Why the dividend exists matters more than any other single factor. I think that is why utilities have been such a great sector this year,” he wrote. “Those equities represent some of the best bond substitute available to most investors, since they provide an essential service and their business models therefore have very little risk.”
iShares Dow Jones Select Dividend
Full disclosure: Tom Lydon’s clients own DVY.