While fixed income ETFs remain popular with advisors, we sense a shift in sentiment. Now that the Federal Reserve has paused raising interest rates, many advisors are also looking to alternative income strategies.
In a mid-June webcast with State Street Global Advisors, VettaFi asked advisors a key question: “Which income asset class do you find most appealing to add to client portfolios right now?” Investment-grade credit was the most popular fixed income choice selected (41%). However, more advisors (46%) chose dividend-paying stocks.
Dividend-Paying Stocks Favored by Advisors
With the SEC yield on the extremely conservative SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) recently hitting 4.9%, we will focus on high-dividend-yielding ETFs. Such funds should provide more capital appreciation potential than short-term bond funds, albeit with more risk. Unlike dividend growth ETFs, high-dividend-yielding ETFs are constructed based on the income generation of equity constituents.
VYM Is the Largest of the High-Dividend ETFs but Is Not Alone
The largest of these is the Vanguard High Dividend Yield ETF (VYM), which manages $49 billion. VYM is tilted toward value sectors like financials (20% of assets), consumer staples (15%), and healthcare (14%). Key holdings include JPMorgan Chase, Johnson & Johnson, and Procter & Gamble, but the fund has more than 450 holdings. The ETF recently had a 3.3% 30-day SEC yield and a modest 0.06% expense ratio. However, there are other lesser-known, more concentrated, and high-yielding ETFs in the investment style worthy of attention.
For example, the Invesco High Yield Dividend Achievers ETF (PEY) has $1.3 billion in assets spread across 51 positions. Relative to VYM, PEY is more exposed to financials (26% of assets) and utilities (19%), with only 1.6% in healthcare companies. KeyCorp, Lincoln National, and Pinnacle West Capital are some of the fund’s top positions. PEY sports a 4.8% 30-day SEC yield, even with a higher 0.52% expense ratio.
Taking an Equal-Weight Approach With the Dogs
The ALPS Sector Dividend Dogs ETF (SDOG) has $1.2 billion in assets invested in 52 stocks. Relative to PEY and VYM, SDOG is more diversified at the sector level. Information technology is the largest at 10.3% of assets, with healthcare and industrials also just above 10%. Meanwhile, at 9.6%, energy is the smallest of the sectors. Medtronic, Intel, and Stanley Black & Decker are examples of stocks inside the fund. SDOG has a 4.5% 30-day SEC yield and charges a 0.36% fee.
The VictoryShares US Large Cap High Dividend Volatility Weighted ETF (CDL) has $360 million in assets spread over 100 holdings. Utilities (24% of assets), financials (18%), and consumer staples (12%) are the largest sectors of the portfolio. Coca-Cola, Consolidated Edison, and Southern Company were among the positions. CDL offers a 3.9% 30-day SEC yield for a 0.35% expense ratio.
For advisors seeking income through dividend-paying stocks, there are strong alternatives to the widely held Vanguard ETF. Of course, it pays to understand what’s inside.
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