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.
FVD follows the Value Line Dividend Index, which equally weights components and utilizes the proprietary Value Line research to select components. Specifically, stocks are ranked by the Value Line Safety Ranking of 1 or 2 out of 5, which are based on price stability and financial strength. Additionally, the index excludes stocks with a dividend yield lower than the S&P 500. FVD has a 2.18% 12-month yield.
SDY reflects the performance of the S&P High Yield Aristocrats Index, which includes a group of so-called dividend aristocrats, or companies that have increased yields for the past 20 years. The ETF has a 2.25% 12-month yield. [Dividend Royalty With ETFs]
Lastly, DHS tracks the WisdomTree Equity Income Index, which includes the highest-yielding 30% companies taken from all dividend-paying U.S. stocks that meet minimum size and liquidity requirements. Unlike other dividend ETFs, components are weighted by their total cash dividends projected to pay in the coming year. The fund has a 2.99% 12-month yield.
For more information on dividend stocks, visit our dividend ETFs category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. 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.