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All Contents © 2020The Kiplinger Washington Editors
By Will Ashworth, Contributing Writer
| February 12, 2020
Assets in U.S. dividend exchange-traded funds (ETFs) have grown exponentially over the past decade. In 2009, America's dividend ETFs collectively held less than $20 billion. By September 2019, they had shot up to almost $200 billion.
In good times and bad, dividend stocks act almost like rent checks, coming monthly or quarterly like clockwork. Many investors, whether you're a professional working on Wall Street or a regular Joe on Main Street, swear by them.
Dividend ETFs take the strategy up a notch by providing investors with a diversified portfolio of dividend-paying stocks. This allows them to collect income without the additional research and trading complications that would come with buying dozens, if not hundreds, of individual components.
If you're in this camp of income-minded set-it-and-forget-it investors, here are 10 dividend ETFs to buy and hold for the long haul. Several are dedicated specifically to dividends, while others simply hold dividend stocks as an indirect result of their strategy. But this is a collection of funds that are diversified by geography, style, size, sector and more, and thus can be held as a group or individually depending on your preferences, risk tolerance and investment horizon.
Data as of Feb. 11. Yields represent the trailing 12-month yield, which is a standard measure for equity funds.
Type: Sector (Real estate)
Assets under management: $1.1 billion
Dividend yield: 3.3%
Expense ratio: 0.084%, or $8.40 annually on a $10,000 investment
Real estate investment trusts (REITs) have done well since the global financial crisis thanks to low interest rates and a reasonable pace of real estate development. This has provided landlords with a nice combination of increased rent, solid occupancy rates and rising property valuations.
The fact Simon Property Group (SPG) has agreed to pay $3.6 billion (a 51% premium!) for 80% control of Taubman Centers (TCO) – a retail REIT that owns 26 mall assets in the U.S. and Asia – says all you need to know about the health of real estate in America at present.
An excellent way to take advantage of the real estate's strength while also generating a reasonable amount of dividend income is to buy shares of Fidelity MSCI Real Estate Index ETF (FREL, $29.23).
FREL tracks the performance of the MSCI USA IMI Real Estate Index, a collection of more than 170 real estate stocks, including Simon Property – a top-10 holding that represents 3.3% of the fund's assets. (Taubman is a holding too, but at a much smaller weighting of 0.2%.) Other top holdings include telecom-infrastructure stock American Tower (AMT) and logistics REIT Prologis (PLD).
This dividend-friendly ETF yields more than 3% while charging a very inexpensive 0.08%, which is about one-sixth the asset class's median cost. Over the past five years, its 8.2% average annual return has been 1.3 percentage points better than its peers.
If you're looking for an inexpensive way to own real estate, FREL is it.
Learn more about FREL at the Fidelity provider site.
Type: Large-cap value
Assets under management: $1.8 billion
Dividend yield: 2.6%
Expense ratio: 0.37%
One of the things that makes the FlexShares Quality Dividend Index Fund (QDF, $49.08) an attractive investment is that it seeks to invest in companies with sustainable yields. A company's core financial health must be strong enough to continue to pay attractive dividends over the long haul.
That's where the quality factor comes in.
QDF tracks the performance of the Northern Trust Quality Dividend Index: a group of high-quality, income-oriented U.S. stocks that are selected based on the expected dividend payment combined with fundamental factors such as profitability, management expertise and cash-flow generation.
The ETF is split between 88% in large caps and the rest in mid-cap stocks. There's a decided value bent (60%), with another 32% considered "blended" and just 8% growth. Information technology (21%) is the biggest chunk of the fund, followed by 15% each in financials and health care. QDF holds more than 130 stocks, but top holdings JPMorgan Chase (JPM), Microsoft (MSFT and Apple (AAPL) alone make up about 13% of the portfolio.
It is a little on the pricier side. Part of that is its regular expenses of 0.37% annually. Also, the index is reconstituted and rebalanced four times a year, and that leads to a considerable annual turnover rate of 76%, which brings up internal trading costs, too.
Learn more about QDF at the FlexShares provider site.
Assets under management: $5.6 billion
Dividend yield: 2.0%
Expense ratio: 0.39%*
The Invesco FTSE RAFI US 1000 ETF (PRF, $128.78), like a few others on the list, aren't necessarily found under a "dividend ETFs" banner, but uses dividends almost like a measure of quality.
PRF tracks the performance of the FTSE RAFI US 1000 Index: a fundamental index that ranks the largest U.S. companies by 1) average sales over the past five years, 2) cash flow over the same period, 3) total dividend distributions over the same period and 4) the book value at the time of review.
The ETF typically holds 1,000 stocks, which are plucked out of the FTSE U.S. All Cap Index – a group of 1,794 U.S. large-, mid- and small-cap stocks. These stocks are ranked according to those four fundamental measures and assigns a score. The thousand companies with the highest scores are selected for inclusion. This process happens once a year, each March.
Ultimately, this is a value fund, which should be attractive to the growing party of people who believe value will make a comeback in 2020. It also has a 2.0% yield – not high, but higher than the broader market at the moment.
If you buy PRF, you'll be holding a fund that's pretty well diversified across the spectrum, but heaviest in financials (19%) and information technology (16%) at the moment. Apple is the top holding at 4% of assets, but interestingly enough, you get a little extra AAPL via Berkshire Hathaway (BRK.B), which accounts for 2% of the fund and counts Apple as its largest equity holding.
* Includes 1-basis-point fee waiver.
Learn more about PRF at the Invesco provider page
Type: Large-cap growth
Assets under management: $52.5 billion
Dividend yield: 1.0%
Expense ratio: 0.19%
The iShares Russell 1000 Growth ETF (IWF, $188.85) is not, categorically speaking, a dividend fund. But it's included in this list of dividend ETFs because it adds an essential part of any balanced portfolio – growth – while delivering at least some income.
The IWF is one of the 15 largest ETFs in the U.S. by assets under management. It tracks the performance of the Russell 1000 Growth Index – a subset of the Russell 1000, which contains a thousand of the largest companies on U.S. markets. Simply put, these are companies that are expected to grow at an above-average rate relative to the market.
IWF's holdings are unsurprisingly loaded with tech stocks, which make up nearly 40% of the fund's assets. It also gives double-digit weights to consumer discretionary, health care and communications stocks, meaning several sectors are barely represented.
It's also extremely top-heavy, with Apple, Microsoft, Amazon.com (AMZN), Google parent Alphabet (GOOGL) and Facebook (FB) alone accounting for 30% of the fund's weight.
But IWF's weight is contributing to (and is also a result of) its outperformance of both the Russell 1000 Value and blended Russell 1000 ETF counterparts. IWF has returned 16.2% annually over the past decade, versus 14.2% for the whole Russell 1000 index and 12% for its value stocks.
Meanwhile, several of IWF's larger holdings boast notable dividend growth, including Visa (V), Mastercard (MA) and even Apple.
Learn more about IWF at the iShares provider site.
Type: International stock (Canada)
Assets under management: $4.1 billion
Dividend yield: 2.3%
It's important to diversify not only across sizes and sectors, but borders, too. That's true even when your focus is on dividend income.
If you don't, you're prone to home-country bias: a condition that creates an overreliance on U.S. stocks. It's something that has become more prevalent in recent years as U.S. stocks have outperformed most other developed markets.
There's no need to overdo it, of course. The U.S. still accounts for 44% of the world's market capitalization, and a diversified portfolio should most always contain a core group of U.S. holdings. But it also couldn't hurt to consider international funds, such as the JPMorgan BetaBuilders Canada ETF (BBCA, $26.52).
BBCA launched in mid-2018. This young fund tracks the Morningstar Canada Target Market Exposure Index, providing exposure to the top 85% of Canada's market capitalization. Today, the ETF holds more than 100 Canadian stocks with an average market cap of $32 billion.
Like many single-country funds, BetaBuilders Canada ETF is top-heavy in more than one way. For one, the top 10 holdings – which include Royal Bank of Canada (RY) and Enbridge (ENB) – make up 44% of the fund's assets. It's also loaded with financial stocks, at 38% of the fund, which is more than double the next closest sector (energy, at 18%). Eight sectors have single-digit exposure.
If your portfolio is already tilted toward the financial sector, BBCA might not be for you. But if you're not, a healthy helping of Canadian dividend stocks provide a decent yield. The reasonable 0.19% fee is nice, too.
Oh, Canada, indeed.
Type: Mid-cap value
Assets under management: $57.6 million
Dividend yield: 2.5%
Expense ratio: 0.40%
The Nuveen ESG Mid-Cap Value ETF (NUMV, $30.33) brings more than 50 years of socially responsible and ESG (environmental, social and governance) investing to mid-cap stocks, which many believe to be the sweet spot of equities.
That's because midsize companies tend to be at a stage in their lives where they've figured out their business models and are growing much faster than their large-cap peers while still being stable enough to withstand the occasional downturn. Again, factor in the idea that value stocks could make a long-term return to investor favor, and you've got an ETF that's ready for primetime.
NUMV tracks the performance of the TIAA ESG USA Mid-Cap Value Index, which looks for mid-cap value stocks whose underlying companies adhere to various ESG standards – everything from impact on climate change to sourcing practices to business ethics. The fund currently holds 83 positions.
Financials (23%), consumer discretionary (17%) and industrials (13%) are the three largest sectors. And the fund is fairly balanced from stock to stock, with the top 10 holdings accounting for just 22% of the ETF's total net assets.
Nuveen ESG Mid-Cap Value, which launched in December 2016, boasts a three-year annualized total return of 8.6% that beats the mid-cap value category average by well more than 2 percentage points.
Long-term, it makes sense to invest in the mid-cap category. NUMV ensures you do so in a responsible manner, in more ways than one.
Learn more about NUMV at the Nuveen provider site.
Type: Small-cap blend
Assets under management: $825.3 million
Dividend yield: 2.1%
The ProShares Russell 2000 Dividend Growers ETF's (SMDV, $61.62) yield is on the low side among pure-play dividend ETFs. But yield isn't the point.
"Several funds focus on dividend growth as a measure of a company's quality, and tend to have smaller current yields as a result. SMDV – which puts it right in the name ("Dividend Growers") – is one such fund. Indeed, it's the only ETF that invests exclusively in the best dividend growth stocks in the small-cap Russell 2000 Index.
SMDV is a small portfolio of just 63 companies that have been selected because they've increased their annual dividend at least once each year for a decade without interruption. They're typically able to do so by delivering stable earnings and consistent growth.
The stocks in the index are equally weighted, meaning that each time the fund is rebalanced – which happens quarterly – every stock accounts for the same amount of the fund's assets. The index must have a minimum of 40 stocks. If there aren't enough stocks with a history of at least 10 years of consecutive dividend increases, SMDV will include stocks with shorter histories to get to 40.
SMDV's constituents have an average market value of $2.1 billion. Top holdings right now include nursing-care facility operator Ensign Group (ENSG), irrigation manufacturing specialist Lindsay Corp. (LNN) and Pennant Group (PNTG) – which, interestingly enough, was spun off of Ensign Group in 2019 to hold its senior living, home health and other businesses.
The fund, which launched in February 2015, has a five-year annualized total return of 11.3% that trounces the small blend category by more than 4 percentage points.
Learn more about SMDV at the ProShares provider site.
Type: Diversified emerging markets
Assets under management: $2.9 billion
Dividend yield: 3.7%
Expense ratio: 0.39%
Before China's coronavirus struck, many in the asset management business believed emerging markets would have a bounce-back year in 2020.
"The gap between rates of economic growth in developed markets and emerging markets is likely to widen in favor of emerging markets in 2020," Lazard Asset Management said in its January 2020 Outlook on Emerging Markets. "The two growth rates had been moving closer together in recent years, but emerging markets could easily start to pull away as the effects of US tax cuts in 2017 continue to fade."
It's impossible to know the future financial impact of the coronavirus. But it stands to reason that once economic activity resumes in China and elsewhere, the pent-up demand for products that weren't shipped due to the outbreak should be significant. As a result, the boost to emerging markets could be very much like a slingshot, providing greater growth in these markets than economists and analysts predict.
With this in mind, consider the Schwab Fundamental Emerging Markets Large Company Index ETF (FNDE, $28.47): an ETF that tracks the performance of the Russell RAFI Emerging Markets Large Company Index. The index selects large-company stocks based on three fundamental measures of company size: adjusted sales, retained operating cash flow and dividends plus share repurchases.
FNDE currently has 300 holdings, the top 10 of which account for 28% of the fund's assets. Those stocks include Russian energy giant Gazprom (GZPFY), Taiwan Semiconductor (TSM) and China Construction Bank (CICHY). Like many emerging-market funds, it's most heavily weighted in China (27%), followed by Taiwan (18%) and Russia (15%). It's also extremely concentrated in financials and energy, which together make up nearly half the fund.
You also get one of the heftiest yields among these 10 dividend ETFs, at 3.7%, which is more than double the S&P 500's yield right now.
Learn more about FNDE at the Schwab provider site.
Type: Foreign large-cap blend
Assets under management: $81.4 billion
Dividend yield: 3.1%
Expense ratio: 0.05%
Vanguard FTSE Developed Markets ETF (VEA, $44.12) is another dividend ETF you can tap for international exposure.
This fund tracks the FTSE Developed All Cap ex US Index, which invests in thousands of stocks across 24 developed markets, including Canada, European countries and Pacific-region nations. VEA itself holds roughly 3,950 stocks, the top 10 of which account for about 10% of total net assets – certainly large compared to the rest of its holdings, but a very thin concentration overall.
Although the prospectus states that the ETF invests in companies of all sizes, it is considered a foreign large-cap blend fund. The median market cap is $25 billion, with large caps making up more than two-thirds of the portfolio; small caps account for just 6% of assets. The top holdings are mega-cap European dividend stocks including Nestle (NSRGY) and Roche Holdings (RHHBY). That concentration in blue-chip dividend payers gives the fund a yield of more than 3%, which puts similarly constructed U.S. dividend ETFs to shame.
While almost half of VEA's assets are dedicated to Europe, Japan is the top country weighting at 22%. The U.K. is the only other double-digit position at 15% of assets.
Owning VEA in combination with FNDE is an inexpensive way to cover the developed and emerging markets outside the U.S. For instance: A $7,500 investment in VEA combined with $2,500 in FNDE would result in annual fees of just $13.50.
Learn more about VEA at the Vanguard provider site.
Type: Small-cap value
Assets under management: $2.1 billion
Dividend yield: 2.9%
Expense ratio: 0.38%
Small-cap dividend stocks aren't the most common way to collect income, but that doesn't mean they're ineffective.
The WisdomTree US SmallCap Dividend Fund (DES, $27.42) tracks the performance of the WisdomTree U.S. SmallCap Dividend Index, a fundamentally weighted index that is comprised of the smallest dividend payers from a broader WisdomTree index.
DES owns more than 740 stocks, and its top 10 holdings – including natural gas transmission company Equitrans Midstream (ETRN) and internet service provider Cogent Communications (CCOI) – account for less than 9% of the portfolio's weight. And while 25% of the fund is financial stocks, it gives high weights to sectors that most of these other funds haven't emphasized: 16% to real estate, 15% to industrials and 11% to consumer discretionary.
The ETF's holdings average about $1.6 billion in market value, though a few holdings are measured in the tens of millions of dollars. But it's the use of dividend weighting by WisdomTree, instead of assigning portfolio value simply by the size of the company, that makes DES such an attractive investment.
Each individual stock's weighting is calculated by dividing the sum of its regular dividends by the sum of the regular dividends for all 743 stocks in the index. This means if you have two companies with identical market values, the one paying out more dividend income would receive a greater weighting and therefore have more effect on DES's performance.
If you're totally committed to dividend investing, WisdomTree's approach is an interesting one not only for small-cap stocks, but stocks of all sizes.
Learn more about DES at the WisdomTree provider site.