Choose The Right Payout ETF

May 22, 2012

With the equity market plunging this month and interest rates so low, it’s no wonder investors are piling into dividend ETFs to supplement their incomes.

However, it would be a mistake to assume all dividend ETFs are the same. There are 13 ETFs that attempt to maximize yield using U.S. companies, 10 of which have been around for at least a year.

Many are designed differently and yield very different results, so it’s important to know what you’re getting into and why.

The table below shows the trailing 12-month dividend yield of each of the 10 ETFs alongside net asset value returns over the same time period.

I’ve also included the same figures for SPY as a frame of reference.

Dividend Summary

One interesting thing you’ll note is that the ETFs with the highest dividend yield aren’t the ETFs with the highest total returns. The iShares Dividend Equity Index Fund (NYSEArca: HDV), which leads its peers with an 8.96 percent total return over the past year, only paid out 2.53 percent in dividends.

In comparison, the PowerShares High Yield Equity Dividend Achievers Portfolio (NYSEArca: PEY) paid out a segment-high 4.22 percent, but only returned 2.93 percent on a total return basis, meaning its holdings depreciated in value even while paying out significant dividends.

There are a few major differences between the dividend ETFs that drive these different yields and returns.

One is their respective selection methodologies: the Vanguard Dividend Appreciation ETF (NYSEArca: VIG), the PowerShares Dividend Achievers Portfolio (NYSEArca: PFM) and PowerShares’ PEY all require 10 years of increasing dividend payments.

The iShares Dow Jones Select Dividend Index Fund (NYSEArca: DVY) requires five years, and SDY, the SPDR S&P Dividend ETF (NYSEArca: SDY) requires a whopping 25-year track record of increasing payouts.

These screens exclude all but the most stalwart dividend payers, meaning that higher growth firms that have only recently started paying dividends are excluded now and for the foreseeable future.


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