Equity: U.S. - High Dividend Yield
The US high-dividend yield segment continues to demonstrate very strong investor interest, with roughly half of the funds holding more than $1B each.
With bond yields at historic lows,
“exposure differences drive performance” equity income has become an increasingly popular strategy. Investors now have more than a dozen funds to choose from in this space, each with its own way of selecting, weighting and defining the high-yield market. Screens range from those that require companies to have a 12-month history of rising dividends to those that require 25 years of rising payouts. There are funds with narrow portfolios of 50 names, and funds that hold nearly 1,000. Some funds tilt toward utilities, while others tilt toward health care, energy or tech.
Perhaps most critically, dividend yields range from 2% to over 6%. Choosing the right fund comes down to parsing these choices. Do you want a portfolio that’s heavy on utilities with broad-based exposure to the dividend market? DVY, the $15B behemoth in the space, is a good choice. Do you want a fund that only buys the most stalwart dividend payers? SDY, which requires 25 consecutive years of dividend payouts, fits the bill (although its stringency drives down yield). Like Technology? Try VYM. Health care? Either HDV or DHS. Low beta? High beta? Large-cap? Small-cap? The choice is yours, and differences drive performance.
While investors target this space first for yield, there is a major difference in total returns between the various funds: Over the past year, the difference between the best- and worst-performing funds in this segment was about 10%—a number greater than the difference in yields. While most of the funds trade well, holding costs differ radically, so long-term investors will want to ensure they really like the more expensive options. (Insight updated 01/16/17)
All Funds (14)
VYM $17.41 B 17411910052.6 cheap to own and trade
SCHD $4.93 B 4930070259.875 low all in costs
DHS $1.28 B 1282536350 trades well
HDV $6.44 B 6443143875 low all in costs
SDY $15.06 B 15059526622.711 screens for 20 years of rising dividends
FDL $1.75 B 1750959055.586 higher holding costs but trades well
DVY $16.87 B 16867316400 Hugely popular
FVD $2.98 B 2979243254.656 high holding costs
PEY $1.09 B 1086848000 higher holding costs
DIV $360.43 M 360432527.69 Low volatility overlay
RDIV $377.44 M 377435550 modest investor interest to date
ELKU $2.78 M 2779655.592 N/A
WBIY $20.68 M 20680500 N/A
VLML $10.23 M 10228504.5 new; trade with care
ETF.com Grade as 01/12/17
Equity: U.S. - High Dividend Yield
ETF.com Efficiency Insight
Costs matter in the high-dividend yield space. After all, if an investor is searching for yield, every penny paid in expenses is a penny lost on yield. And the costs here vary widely, from
“Funds like VIG and VYM tend to cost even less than their headline fee” SCHD's 0.07% to FVD’s and DIVC's 0.70%.
Real world holding costs—measured by our rolling one-year tracking differences—vary even more. Funds like VIG and VYM—cheap as they are—tend to cost even less than their headline fee, a remarkable feat. In contrast, FVD’s high-fee offering costs closer to 100 bps for a typical 1 year period. The bottom line for investors with longer time horizons is to check both the fee and the median tracking difference. Let small differences go, but large discrepancies in costs should factor into your long term allocation decision.
Asset levels also vary greatly in the segment. Investor interest in yield plays remains very strong. Roughly a half-dozen funds have more than $1B in AUM each, and no fund faces elevated closure risk.
All funds in the segment are tax efficient, removing another worry for investors. No fund in the segment has paid a capital gain in the past 3 years.
Overall, the segment offers a broad group of efficient funds, with their scores generally in proportion to their fees. (Insight updated 01/16/17)
ETF.com Tradability Insight
Almost all funds in the segment offer sufficient liquidity for retail and institutional investors. The liquid funds trade at spreads of 10 bps or tighter, and trade more than $1M most
“Active traders can find the best on-screen liquidity in DVY, SDY, VIG and VYM” days.
Active traders can find the best on-screen liquidity in DVY, SDY, VIG and VYM, all of which trade over $50 million a day with tiny spreads. HDV and SCHD aren’t too far behind the lead pack and offer ample liquidity for most investor needs.
The exceptions are PFM, RDIMV and DIVC. PFM trades more than $600K most days, at spreads of 13 bps, so most investors can get in and out fairly with some effort. RDIV has similar liquidity, which is to say workable but not great. DIVC lags the pack with wider spreads and anemic volume.
(Insight updated 01/16/17)
ETF.com Fit Insight
The funds in this segment provide a wide range of exposures, as evidenced by the 10% total return spread between the best- and worst-performing ETF in the segment over the past
“DIV and RDIV show very high portfolio yields but differ radically from our benchmark” year.
DVY focuses on firms that have a 5-year history of paying consistent, sustainable, and rising dividends, and weights firms by price. DVY’s portfolio has a smaller average market cap than most competing funds and carries one of the heaviest weightings to utilities firms—roughly 1/3 of the portfolio. DHS offers a broad portfolio with nearly 1,000 names (once one accounts for the ETFs it holds) with one of the more attractive yields in the segment. DHS has a much smaller stake in utilities, but overweights telecom and financials. Investors who like the health care and telecom sectors can amplify that exposure further with HDV, which has strong yield and takes huge positions in mega-cap stocks like AT&T and J&J.
The two PowerShares funds have very different exposures thanks to two very different approaches. PEY holds the 50 highest-yielding companies in its selection universe with 10 years of increasing dividends, which causes it to tilt small, but also boosts its yield. PFM, meanwhile, has a larger basket that favors larger firms and carries a much lower yield. The two funds also differ in their sector concentrations, with PEY focused on utilities and financials and PFM focused on energy and consumer stocks.
First Trust also offers two very different funds in FVD and FDL. FVD equally weights its portfolio of about 200 holdings, using the Value Line proprietary dividend safety model to screen firms. FDL’s market-cap-weighted portfolio offers the higher yield thanks to a concentrated portfolio that has huge positions in the largest dividend-paying firms in the country, like AT&T and Chevron. This leads to big overweights to utilities and telecom firms.
SDY and VIG, two of the segment’s most popular funds, further highlight how different yield-hungry investors are. VIG tilts nearly twice as large, and carries less yield as it focuses on dividend appreciation, which gives it’s a growthier feel. SDY overweights financials and materials, while VIG gives industrial and consumer stocks big bumps.
VYM offers one of the broader portfolios in the segment, with very few sector bets and a yield that is roughly equal to our benchmark. HDV carries the greatest health care exposure of the group along with a large overweighting to telecom firms. SCHD underweights financials significantly, but allocates the difference to consumer non-cyclicals. Newer entrants DIV and RDIV show very high portfolio yields but differ radically from our benchmark. DIVC, another new offering, takes the opposite approach by foregoing yield altogether and focusing instead on the long term growth prospects of high dividend payers. (Insight updated 01/16/17)