Dividend ETFs often appeal to investors seeking reliable or elevated income opportunities. Before investing, advisors and investors should understand two core elements of dividend ETFs.
Is the Strategy Growth or Yield Oriented, or Both?
Dividend ETFs generally fall into three broad categories: those seeking dividend growth, those seeking high yield, or a combination of the two. Dividend growth ETFs seek companies that have consistently grown their dividends over time, offering a potential sustained dividend growth. However, these reliable dividend-paying companies may offer a more muted yield than their higher-yield counterparts. For those in retirement, seeking companies with predictable dividends or growing dividends sustainably over time may align with investing goals.
On the other hand, high yield dividend strategies often seek those companies with elevated yields. Dividend yield is measured by dividing the annual dividends paid by the share price. It’s important to understand that high dividend yields do not necessarily equate to sustainable yield, however. Sometimes, a stock’s high dividend yield is simply the result of its share price declining while the dividends paid remain constant. In these cases, companies may be more prone to reducing their dividend payments. Younger investors with higher risk tolerances may consider a high-yield strategy to best suit their needs.
Dividend strategies that combine both high yield investing with dividend growth offer a balance between risk and income. Such strategies may appeal to investors with longer investment timelines who seek to reinvest income earned to grow their wealth. They may also appeal to those investors near retirement seeking reliable income but with higher income potential.
Each individual strategy has a place in a portfolio and appeals to a range of investors. Combining both approaches into a singular ETF may offer the benefits of reliability and high yield while counterbalancing risks associated with each strategy. Understanding performance expectations, both short—and long-term, allows for more optimal placement and allocation.
How Do Dividend ETFs Select Their Securities?
While dividends may seem like a straightforward concept, dividend-focused strategies screen dividend-paying companies in various ways.
Some strategies screen for quality when selecting companies. Quality is defined in a number of different ways, using a variety of different measurements. Overall, quality strategies focus on those companies that demonstrate strong balance sheets or cash flows. A financially stable company with reliable cash flows and a dependable balance sheet is less likely to cut or reduce dividend payments than a financially unstable company. For income investors, this reliability is often the highest priority.
Quality screens with a focus on sustainable dividend growth seek to offer reliable income for investors. Understanding what metrics a fund prioritizes when selecting quality dividend-paying securities could potentially reduce unexpected surprises within the portfolio.
Some dividend strategies focus purely on high yielding dividend stocks and do not offer quality screens. While this yield-focused approach may lead to attractive levels of income, it also comes with generally higher risk than strategies that seek sustainable dividend growth. Other strategies screen for size, geographic region, or industry. Dividend ETFs offer both diversified and more concentrated exposures within their portfolios.
Fidelity offers a variety of dividend ETFs that incorporate both dividend growth and dividend yield approaches to potentially balance risk while generating income. These include the Fidelity High Dividend ETF (FDVV), the Fidelity Dividend ETF for Rising Rates (FDRR), and the Fidelity International High Dividend ETF (FIDI). Visit Fidelity’s ETF Pricing and Performance page to learn more.
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