Exchange traded funds that track solid, stable companies with a history of dependable dividend growth can provide better risk-adjusted returns.
For instance, the Vanguard Dividend Appreciation ETF (NYSEArca: VIG), which tracks U.S. stocks that have increased dividends on a regular basis for at least 10 consecutive years, has outperformed the market with slightly less risk since 2008, writes Michael Bodman, the principal of Portfolio Economics, for Seeking Alpha. [Dividend, Buyback ETFs for Value Investors]
Since the start of 2008, VIG has generated a 49.5% return, compared to the SPDR S&P 500 ETF (NYSEArca: SPY) 45.1% return. Looking at risk, the standard deviation of SPY is 23.41, whereas VIG shows a 22.77 standard deviation.
Dividends have been a long historical source of overall returns for investors. According to Columbia Management, dividends have accounted for 42% of investor’s total return. VIG currently offers a 1.91% 12-month yield.
Ever since 1926, stocks that pay a dividend have historically outperformed non-dividend paying stocks by 1.7% on an annualized basis, according to Morningstar analyst Michael Rawson.
VIG is no exception. After it first began trading in April 2006, VIG has returned an annualized 7.9% through mid-November, beating the 7.6% return from the S&P 500 index. Additionally, due to its focus on high-quality companies with returns on capital that are less sensitive to market cycles, VIG’s holdings were better able to better withstand the swings following the financial crisis.
“Since its inception, the [VIG] has also exhibited slightly less volatility than the S&P 500, and investors should expect a lower risk profile in the future,” Rawson added.
For long-term investors, VIG offers a cheap 0.10% expense ratio, which is 91% lower than funds with similar holdings.
Additionally, there are a number of alternative quality dividend ETFs that focus on companies with consistent dividend growth. For instance, the Schwab US Dividend Equity ETF (NYSEArca: SCHD), which includes 100 stocks with consistent dividend payouts for at least 10 consecutive years, has a 2.58% 12-month yield and a dirt cheap 0.07% expense ratio. The SPDR S&P Dividend ETF (NYSEArca: SDY), which holds firms that have a minimum dividend increase streak of 20 years for inclusion, comes with a 2.20% 12-month yield and a 0.35% expense ratio. Lastly, the ProShares S&P 500 Aristocrats ETF (NYSEArca: NOBL), which includes companies that have increased their dividends for at least 25 consecutive years, has a 1.57% 12-month yield and a 0.35% expense ratio. [Quality Dividend ETFs with Consistent Yields]
For more information on dividend stocks, visit our dividend ETFs category.
Max Chen contributed to this article.