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All Contents © 2020The Kiplinger Washington Editors
By Kyle Woodley, Senior Investing Editor
| July 30, 2018
Investors rely on exchange-traded funds to give them instant diversification across a wide number of strategies: growth, value, sectors, geography … and of course, dividends. Dividend ETFs such as the Vanguard Dividend Appreciation ETF (VIG) and Vanguard High Dividend Yield ETF (VYM) have amassed tens of billions of dollars in assets, largely because they and similar ETFs can provide wide, simple access to large baskets of stocks at a low cost.
But sometimes, a wrinkle or two can pay, ahem, dividends.
Numerous fund providers, to battle the likes of Vanguard and iShares, have put out their own specialized dividend ETFs that go a step or two past the plain-vanilla indices. These funds look to provide income, but in smaller slivers of the market with additional benefits, such as low volatility or growth from a specific sector.
Here are seven dividend ETFs that “do it differently.” Some are starting to enjoy mainstream adoption, while others are still trying to attract meaningful assets. But each offers some sort of differentiator that may give it a performance edge.
Data is as of July 27, 2018. Yields represent the trailing 12-month yield, which is a standard measure for equity funds. Click on ticker-symbol links in each slide for current share prices and more.
Market value: $2.6 billion
Dividend yield: 3.6%
Low-volatility funds came into being in 2011 with the launch of the Invesco S&P 500 Low Volatility ETF (SPLV). The simple idea behind this kind of fund: to gain exposure to stocks with lower volatility than the rest of the market. In theory, that should allow investors to minimize downside during market downswings, but still participate in some upside when markets rally.
The Invesco S&P 500 High Dividend Low Volatility ETF (SPHD, $41.16), launched a little more than a year later, is a slightly tweaked sister fund to SPLV. The SPHD targets the 50 companies in the Standard & Poor’s 500-stock index that best deliver low volatility and high dividend yields.
That results in a portfolio that’s heaviest in utilities (21%), real estate investment trusts (21.6%) and consumer staples (14%). REITs are especially prominent in the top holdings – currently, HCP Inc. (HCP), Welltower (WELL), Iron Mountain (IRM) and Ventas (VTR) make up the four largest positions in SPHD’s portfolio.
By adding higher dividends into the mix, SPHD should be able to provide even more downside protection against down markets. But in practice, SPHD has been effective across long bullish periods. Since inception in October 2012, it has outperformed SPLV, 98.7%-93.2%, on a total-return basis (which means dividends are included).
Investors should be aware, however, that while funds such as SPHD or SPLV should provide lower volatility over long time periods, that doesn’t mean they won’t drop with the rest of the market on very sharp short-term dips. After all, most of these types of funds are made up of the very same stocks that trade in the major indices.
Market value: $2.3 billion
Dividend yield: 3.5%
The “Dogs of the Dow” is a simple and popular investing strategy that involves investing an equal amount of money into each of the 10 highest-yielding Dow Jones Industrial Average components at the start of the year, holding them for a year, then repeating the process next year.
It’s a yield strategy, sure – but it’s also a value one. Higher yields sometimes can be a result of stock-price losses; but because Dow stocks theoretically are resilient blue chips, they should bounce back, delivering not just dividends but price appreciation.
The ALPS Sector Dividend Dogs ETF (SDOG, $45.21) takes that strategy for a spin, applying it to the S&P 500 on a sector basis. The SDOG selects five companies from each of the 10 GICS sectors, excluding REITs (for a total of 50 stocks), then equally weights them at 2% apiece at each balancing. Stocks slightly grow and shrink in weight as prices rise and fall, of course, so at the moment, top positions include the likes of electric-and-gas utility Scana (SCG), energy firm Williams Companies (WMB) and electric utility PPL Corp. (PLL).
The result is a diversified, balanced fund that yields 3.5% at the moment – almost double the S&P 500’s current yield.
Market value: $899.3 million
Dividend yield: 2.5%
Investors are increasingly waking up to the fact that technology isn’t just about growth anymore. The sector – driven by increasingly mature companies that are looking for places to put their massive war chests to work – also is becoming a dividend dynamo.
The First Trust Nasdaq Technology Dividend Index Fund (TDIV, $36.67), which came to life in 2012, is both a reflection of that trend and a way to play it. The TDIV is a portfolio of more than 90 holdings that meet a thin set of dividend criteria – a minimum yield of 0.5%, a dividend paid in the past 12 months and no decrease in the payout over the past 12 months – among other requirements. And while the ETF rebalances twice a year, companies that fail any threshold are booted immediately.
TDIV uses a modified market cap weighting system that factors in dividend value, and also caps how much of the portfolio any one stock can occupy. Still, TDIV has several high weights at the top – Microsoft (MSFT), International Business Machines (IBM) and Apple (AAPL) command 8% or more of the fund’s assets each.
The fund also has been a fountain of dividend growth since inception, although not in a perfect straight line. While the dividend has ebbed and flowed a little bit, trailing 12-month dividends are 77% higher than they were from the fund’s first full year of payouts.
Market value: $345.4 million
Dividend yield: 3.1%
There’s no confusing the intent of the Fidelity Dividend ETF for Rising Rates (FDRR, $31.43). There’s also no mystery behind why Fidelity launched this fund in September 2016, less than a year after the Federal Reserve finally raised interest rates for the first time since 2006.
Rising interest rates can hamper stocks in a couple of ways. For one, it makes borrowing money more expensive, and thus debt repayments can siphon away profits. Also, as the yields on bonds get higher, certain dividend stocks with lower yields (and stagnant payouts) look less attractive as sources of income.
Fidelity’s FDRR looks to combat this by looking for large- and mid-cap stocks that are expected not just to continue paying dividends, but grow them over time. It also favors stocks that have “a positive correlation of returns to increasing 10-year U.S. Treasury yields.”
The result is a diversified group of roughly 110 stocks you’re likely to see in just about any blue-chip-heavy index: Apple, Microsoft, Pfizer (PFE) and Intel (INTC). It’s also chock full of Dividend Aristocrats such as Johnson & Johnson (JNJ) and Exxon Mobil (XOM) – companies that have increased their dividends for a minimum of 25 consecutive years.
Market value: $416.4 million
Dividend yield: 7.2%
Real estate investment trusts (REITs) are a special equity category that were created by Congress in 1960 to give investors better access to real estate. These companies own and often operate a wide variety of properties, from apartments and office buildings to data centers and self-storage units. REITs also are an income-hunter favorite, as they’re exempt from federal taxes as long as they distribute at least 90% of their taxable income to shareholders in the form of dividends.
Many REIT ETFs tend to focus on the biggest REITs, however, which tends to lead to muted yields compared to what they’d expect from the sector.
The Invesco KBW Premium Yield Equity REIT ETF (KBWY, $34.45) doesn’t have that problem.
KBWY is made up of 30 mid- and small-cap REITs that are weighted using a modified dividend-yield methodology, which essentially puts the higher-yielding companies in the driver’s seat. At the moment, that includes the likes of retail-focused Washington Prime Group (WPG, 13.2% yield) and senior housing REIT New Senior Investment Group (SNR, 14.9% yield).
The upside is clear: The KBWY, at more than 7% yield, offers far more income potential than more vanilla funds such as the Vanguard REIT ETF (VNQ, 3.6% yield). But its emphasis on smaller, higher-yielding REITs does pose some performance risk, as uber-high yields can be the result of plunging stocks – which themselves are the byproduct of a deteriorating business.
Market value: $46.7 million
Dividend yield: 0.8%
When you evaluate dividend funds, it’s important to understand exactly what “dividend growth” means, and what it doesn’t mean.
Dividend growth simply means the payout is getting larger compared to what it used to be, and it likely means the underlying company’s financials are sturdy enough to support those higher payouts. But dividend growth doesn’t necessarily mean a high current yield.
Enter the Reality Shares Divcon Leaders Dividend ETF (LEAD, $33.36), which might have “dividend” in the name, but states on its own fund page that “The funds are not designed to deliver substantial dividend income, and may not be appropriate for investors seeking dividend income.”
That’s true. The 0.8% current yield is far from substantial.
Think of LEAD as using dividend growth as a way to identify quality long-term holdings. The ETF uses Reality Shares’ DIVCON methodology that uses seven qualitative factors to determine which S&P 500 companies are likeliest to increase their dividends. The idea goes, the companies that are best able (and likely to) raise their payouts likely also have solid and improving financials – qualities that typically go hand-in-hand with rising stocks.
To wit: Top holdings MasterCard (MA), Intuit (INTU) and Nvidia (NVDA) all have yields below 1% … but they’ve all appreciated by roughly 50%-55% over the past year.
Market value: $4.2 million
Index yield: 1.9%*
The First Trust SMID Cap Rising Dividend Achievers ETF (SDVY, $21.04) borrows a little from the concept of Reality Shares’ LEAD but targets a different kind of stock.
Rather than S&P 500 companies, SDVY invests in 100 small- and mid-cap stocks that have a history of dividend growth – specifically, the dividends paid over the past 12 months must be greater than the dividends paid in the trailing 12-month periods three and five years ago. It also has a few quality screens, such as cash-to-debt above 25% and a TTM payout ratio no greater than 65%. The 100 best-rated stocks that make the cut are then equally weighted.
Like LEAD, this isn’t a yield play. At 1.9%, SDVY yields less than 10-year Treasuries and barely more than the broader market. Instead, it’s a quality play in the mid- and small-cap space, which is filled with growth potential, but also plenty of landmines. By targeting the smaller companies that are best able to afford increasing dividends – right now, that includes Universal Insurance Holdings (UVE) and risk-management product provider Assurant (AIZ) – SDVY helps shave some of the risk from this explosive area of the market.
One note, though: This young fund has only been around since September 2017, and has very little in assets under management and daily volume. Thus, it’s not a very liquid fund, and it will need to attract more in assets over time to avoid being a risk for closure.
* Because the fund has not been around 12 months, there is no trailing 12-month yield. The index yield is the trailing 12-month yield of the underlying index’s constituents.