Dividend ETFs: High Yield Vs. High Return

November 26, 2012

Yield should be the second number you look at in choosing a high-dividend yield fund.

High-dividend-yield equity ETFs enjoy strong investor interest in today’s low-yield environment, but their performance varies greatly.

These funds compete to deliver the highest yield to investors, which makes perfect sense.

But I wonder how often a fund's total return is overlooked. Yield is one of the two components of total return. The other is capital appreciation, or just plain price, if you like.

My message is simple: When shopping for high-dividend yield funds, by all means, look at the yield, but also compare total return.

High-dividend-yield ETFs competing in the same market segment—whether U.S., global, international or emerging—can produce remarkably different returns even if the yields are similar.

The table below shows this. I picked a representative fund with comparatively high or low 12-month total return among U.S. high-yield equity ETFs.

In this case, the yields for the two funds—the WisdomTree Equity Income ETF (NYSEArca: DHS) and the PowerShares High Yield Equity Dividend Achievers (NYSEArca: PEY)—are similar, but note that the returns differ by 5.4 percentage points.

How can this be?

Simple. PEY and DHS have very different portfolios.

High-yield ETFs use a wide variety of screening techniques to pick their stocks—including yield, of course—but also dividend growth, dividend consistency, payout ratios and a host of other factors.

The different screens and the pool of stocks they are applied to—the parent index, in other words—vary greatly. This in turn produces funds with very different portfolios and therefore diverging returns.

In this case, PEY favors utility and financial sector stocks and allocates heavily to small-cap stocks. DHS meanwhile shows a strong bias toward health care and telecom firms, and is dominated by large-caps.

Small wonder, then, that their returns diverge so dramatically.

The difference in returns is just as dramatic in other market segments, namely global, international and emerging. Each pair here also shows significantly higher yield for the fund with poor returns.

Yield can be measured a half dozen different ways, but the common denominator—literally—is price. As price falls, yield goes up. This simple notion is just one more reason to check the total return when choosing a fund.

A strategist at a fund issuer stopped by our offices recently and commented on the difference in perception on high yield when it comes to bonds vs. stocks.

High-yield bonds immediately bring to mind high risk, but high-dividend yield equities do not. After all, equity dividend payers are often large, mature firms—well past their frothy growth phase—that generate consistent cash flows and pass them to their investors.

Still, the examples above show that risk lives here too.



At the time this article was written, the author had no positions in the securities mentioned. Contact Paul Britt at [email protected].


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