Some investors might be surprised to learn their dividend ETFs are paying out less than Treasury bonds. Of course, comparing the yields of stock ETFs and individual bonds isn’t exactly fair because the asset classes have different risk profiles and volatility levels. Still, it’s been a long time since 10-year Treasury notes have paid more than dividend ETFs in a low-rate environment. Some investors have looked beyond fixed-income markets to boost yield, including equity-based dividend ETFs.

Why are the dividend yields of VIG and SDY relatively low?

VIG, the Vanguard dividend ETF, focuses on firms that have raised dividends for at least 10 years straight, explains Morningstar analyst Samuel Lee.

“The fund’s index provider, Mergent, weeds out firms that fail its financial strength screens,” he writes in a profile of VIG. “Unfortunately, the exact methodology is secret but seems to focus on firms with lower leverage and ample cash flow. The result is quality rather than a high yield.”

In other words, the ETF is trading some yield for quality and stability.

Similarly, SDY holds companies that have raised their dividends every year for the past 20 years. The ETF weights individual stocks by their dividend yield.

Full disclosure: Tom Lydon’s clients own DVY.

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