ETFs Made Easy: Dividend Fund Diversity

February 17, 2015

Useful Metrics

Take DIV, the SuperDividend ETF, as an example. If you look on the overview page for the fund here at ETF.com, you’ll see a field called “Distribution Yield.” That’s a backward-looking measure of the last year’s worth of all distributions—dividends, capital gains, income—calculated with its current price.

DIV shows 5.47 percent there. It’s a useful statistic to understand how much you’ll need to worry from a tax perspective.

But what most people care about is what they can expect next quarter.

If you go to the “fit” tab on that same page, you’ll also see a field called “Dividend Yield.” For DIV, it’s 6.36 percent. That number is looking at the weighted average of the annual yield from the most recent dividend payments of all the individual stocks inside the portfolio.

It’s not a crystal ball—companies can and do change their dividends over time. But it’s a pretty shiny rearview mirror that should give you a good sense of what to expect.

Know The Strategy

It’s tempting to just look at the highest-yielding fund in the high-dividend yield segment—in this case, it is DIV—and say, “That’s the one for me.” But it’s important to recognize that different dividend strategies have very different goals.

DIV, for its part, is deliberately selecting a small, 50-stock portfolio of just high-yielding stocks. It’s not trying to represent the total market, and it includes big slugs of things like pipelines and real estate.

VIG, for its part, actually has the lowest dividend yield in the whole segment, but it’s not chasing yield specifically. Its methodology is looking for companies that have increased their dividends recently, with the idea being that they’re poised for growth.

In fact, every one of the 14 funds in the segment has a very different approach to using dividends to select and weight the portfolio.

Do Your Homework

So while the idea of dividend investing seems easy, it requires a really hard look at the competing funds to decide which one is right for you—more so than in many other segments.

In fact, one recently launched fund, the Reality Shares DIVS ETF (DIVY), doesn’t even invest in stocks at all! It uses derivatives to extract just the dividend-growth part of outperformance—a unique strategy Paul Britt explained in detail.

In other words, you absolutely cannot just look for the word “dividend” in a fund description and stop there. Dividend investing can make a lot of sense, but you can’t just take it at face value.


At the time this article was written, the author held no positions in the securities mentioned. You can reach Dave Nadig at [email protected], or on Twitter @DaveNadig.

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