When searching for yield-generating exchange traded fund options, a stable income stream is the most important factor to consider.
“After all, investors looking to these funds as a source of cash flow would be disappointed to find that their income stream is volatile,” Ben Johnson, director of global ETF research for Morningstar, said in an Investor’s Business Daily article.
Johnson recently scrutinized a group of large-cap dividend ETF strategies and pointed to five stand outs, including the Vanguard Dividend Appreciation ETF (NYSEArca: VIG), PowerShares Dividend Achievers Portfolio (NYSEArca: PFM), First Trust Value Line Dividend Index Fund (NYSEArca: FVD), SPDR S&P Dividend ETF (NYSEArca: SDY) and WisdomTree Equity Income Fund (NYSEArca: DHS). [Retirees Should Think About Augmenting Yields with Dividend ETFs]
The five ETFs were screened for stocks that steadily paid or grew dividends and also generated stable income compared to their peers. Additionally, the dividend ETFs experienced relative low dividend drawdown, or year-over-year decline in annual dividend payment, in 2009, the period following the financial crisis.
“Some ETPs (exchange traded products) are clearly taking on more risk than others when they go about building an income-oriented portfolio,” Johnson said in the article. “It’s important to look for funds that track benchmarks which incorporate some sort of (dividend) sustainability screen. Investors should place a premium on income stability, particularly in bear markets.”
Each of the five dividend ETFs include some sort of sustainability screen. For instance, VIG and PFM both track the Nasdaq US Broad Dividend Achievers index, which screens stocks that have increased their regular dividend for at least 10 consecutive years. VIG has a 2.14% 12-month yield and PFM has a 1.95% 12-month yield.