Just how important are stock dividends? Over the long haul, these cash payouts have accounted for about 30% of overall U.S. market returns. In periods of poor performance, they’ve played an even larger role in overall market returns. For that reason, we set out to find the best exchange-traded funds that invest in dividend-paying stocks. As you’ll see, every dividend index fund has its own strategy. The funds are listed in alphabetical order. All returns and yields are through August 20.
ALPS Sector Dividend Dogs
Current yield: 3.3%
Assets: $802 million
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Expense ratio: 0.40%
Top five holdings: Williams Cos., Windstream Holdings, Frontier Communications, Intel, Cablevision Systems-NY Group
Value investors will appreciate ALPS Sector Dividend Dogs (symbol SDOG). It takes the Dogs of the Dow strategy, which invests in the ten highest-yielding stocks in the Dow Jones industrial average, and applies it to the top yielders across the ten sectors of Standard & Poor’s 500-stock index. The fund’s 50 stocks—the five highest yielders in each sector—are equally weighted. Each security represents about 2% of the fund’s assets; each sector, 10%. Sector Dividend Dogs launched in June 2012, so it doesn’t have much of a record. But over the past year, its 23.2% gain outpaced the returns of the two most popular dividend ETFs, Vanguard Dividend Appreciation (VIG) and iShares Select Dividend (DVY), by a whopping 6.7 and 4.2 percentage points, respectively. The S&P 500 returned 22.7% over the past year.
iShares Select Dividend Index
Current yield: 3.1%
Assets: $14.1 billion
Expense ratio: 0.39%
Top five holdings: Lockheed Martin, Chevron, Entergy, Philip Morris, Integrys Energy
iShares Select Dividend Index (DVY) follows a Dow Jones index that includes 95% of publicly traded U.S. stocks (though not real estate investment trusts) that have maintained or increased dividends over the past five years. In addition, the underlying index—the Dow Jones U.S. Select Dividend index—excludes companies that have paid out more than 60% of profits. The ETF is heavy in utilities: Almost 35% of its assets are invested in the sector.
Schwab U.S. Dividend Equity
Current yield: 2.9%
Assets: $2.0 billion
Expense ratio: 0.07%
Top five holdings: Microsoft, Procter & Gamble, Chevron, Johnson & Johnson, Pfizer
With its minuscule expense ratio, Schwab U.S. Dividend Equity (SCHD) is the cheapest of all the funds highlighted in this story. To be eligible for this ETF, companies have to have paid dividends every year for at least 10 years and must boast a market value of at least $500 million, and their stocks must have significant daily trading volume. Finally, only those companies with the best relative financial strength—as measured by four factors, including return on equity and five-year dividend growth rate—make the cut. U.S. Dividend Equity is less than three years old. Over the past year, the fund earned 19.3%, the third-best performance among the ETFs on our list. And it did so with less volatility than most of them.
SPDR S&P Dividend
Current yield: 2.3%
Assets: $12.9 billion
Expense ratio: 0.35%
Top five holdings: HCP, AT&T, Consolidated Edison, People’s United Financial, National Retail Properties
The index SPDR S&P Dividend ETF (SDY) tracks has a snooty name: the S&P High Yield Dividend Aristocrats. But the name makes sense when you find out what membership requires. Out of the S&P Composite 1500 index, which represents 90% of all publicly traded U.S. companies, only those firms that have raised their dividend without pause in each of the past 20 years are permitted entry. This requirement tilts the index—and the ETF—toward high-quality firms that are still growing; after all, they have to continue to raise their dividends. The fund holds 97 stocks and ranks them by dividend yield. This is the fund to own in down markets. In 2008, while the S&P 500 plummeted 37.0%, this aristocratic S&P Dividend ETF dropped 22.9%. The fund outperformed in choppy 2011, too, returning 7.1%, compared with the S&P 500’s gain of 2.0%.
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Vanguard Dividend Appreciation
Current yield: 2.1%
Assets: $19.7 billion
Expense ratio: 0.10%
Top five holdings: Johnson & Johnson, IBM, Coca-Cola, Exxon Mobil, PepsiCo
Dividend Appreciation (VIG) is one of the biggest ETFs and also one of the cheapest. It focuses on companies that raise their dividends, not stocks with high yields. Only U.S. companies that have increased their dividends every year for at least the past 10 years make it into the fund (it excludes REITs and master limited partnerships). At last report 163 stocks made the grade. Because of the fund’s requirements, consumer stocks and industrials get bigger play than most other stocks. The two sectors combined make up more than half of the fund’s assets. Interestingly, financial firms account for only 7% of assets, a legacy of the financial crisis, which forced many banks to cut dividends or, at best, stop raising them.
WisdomTree MidCap Dividend
Current yield: 2.5%
Assets: $1.2 billion
Expense ratio: 0.38%
Top five holdings: Windstream, Frontier Communications, Ameren Corp., Dr Pepper Snapple Group, Pepco Holdings
WisdomTree MidCap Dividend (DON) creates a proprietary index for each of its ETFs. This one includes midsize U.S. firms—those with market capitalizations of $2 billion to $17 billion—that pay dividends. But in a twist to traditional index funds, which weight companies by market value, MidCap Dividend Fund weights its 390 stocks by the dollar amount each company is expected to pay out over the next year. Over the past five years, the fund returned 20.7% annualized, beating the more traditional iShares Russell Mid-Cap ETF (IWR) by an average of 1.5 percentage points per year, and it has done so with less volatility.
WisdomTree SmallCap Dividend
Current yield: 2.8%
Assets: $1.0 billion
Expense ratio: 0.38%
Top five holdings: Vector Group, Lexmark International, Covanta Holding, PDL BioPharma, WGL
WisdomTree SmallCap Dividend (DES) fund has delivered more bang with less angst than its traditional index counterpart, iShares Russell 2000 ETF (IWM). Over the past five years, SmallCap Dividend Fund has been 15% less volatile than the iShares ETF. But over that stretch, it returned 18.5% annualized, outpacing the iShares ETF by an average of 1.7 percentage points per year. Like its midcap sibling, this WisdomTree ETF tracks a proprietary index. This one focuses on the smallest U.S. firms that pay dividends and weights its 679 holdings by cash dividends each company is expected to pay in the coming year.
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