The search for yield continues. If at the start of 2019 investors were hanging their hats on higher rates to bolster portfolio yield, they have been sorely disappointed.
Rather than rise—as many had expected at the start of the year—interest rates have fallen sharply, leaving investors with few options in the fixed income space to generate income.
Retirees in particular often rely on the fixed coupon payments of bonds to generate income. But with the 10-year Treasury yield last yielding only 1.75%—not far from record lows—they’ve had to look elsewhere for that income.
One place they can still find it is in the equity market; namely, dividend ETFs. Yields on these funds can be double that of the 10-year Treasury. For example, the Vanguard High Yield Dividend Yield ETF (VYM), the second-largest dividend ETF on the market, has a 30-day SEC yield of around 3.3%.
Viable, But Not Perfect
Make no mistake, dividend ETFs are not a perfect replacement for bonds. The risk and reward characteristics of the investment vehicles are quite different, and perhaps most importantly, dividend ETFs expose investors to equity market risk—for better or for worse.
Still, for investors who can look past the volatility of equities, dividend ETFs are a viable alternative to fixed income for generating yield. In this article, we’ll take a look at some of the top dividend ETFs ranked by various factors—assets under management, performance and flows.
2 Main Strategies
Like many segments of the ETF market, the dividend space is top-heavy. Of the $196 billion invested in U.S.-listed dividend ETFs, the top 10 funds account for 73.5% of those assets.
The biggest of them all is the $38.8 billion Vanguard Dividend Appreciation ETF (VIG). Many dividend ETFs focus on one of two strategies—high yield or dividend growth.
VIG targets dividend growth, holding stocks of U.S. companies that have grown their dividends for at least 10 consecutive years. The focus on dividend growth as opposed to high yields is an important distinction. VIG’s 30-day SEC yield of 1.83% is actually less than the S&P 500’s equivalent yield of 1.97%.
But VIG’s underlying holdings have managed to increase their dividend much more consistently than the broader S&P 500, which results in higher yields over time.
Taking the other dividend approach is the $26.2 billion Vanguard High Dividend Yield ETF (VYM). VYM’s sole focus is yield, not growth. It simply holds the half of the market with the highest dividend yields and then market-cap-weights them. The result is a juicier 3.33% yield, at the expense of the long-term growth of that yield.
The Largest Funds
The eight largest dividend ETFs after VIG and VYM all offer some form of high yield or dividend growth, and use various selection criteria.
Some of the more unique funds in the list include:
- SPDR S&P Dividend ETF (SDY), which only holds stocks of firms that have increased dividends over the past 20 years
- First Trust Value Line Dividend Index Fund (FVD), which holds an equal-weighted basket of dividend stocks
- iShares Core High Dividend ETF (HDV), which only holds stocks of companies with a sustainable competitive advantage
- WisdomTree U.S. MidCap Dividend Fund (DON), which holds midcap dividend stocks
- iShares International Select Dividend ETF (IDV), which holds the highest-yielding stocks in developed countries outside of the U.S.
Largest Dividend ETFs
|VIG||Vanguard Dividend Appreciation ETF||$38.83B||0.06%|
|VYM||Vanguard High Dividend Yield ETF||$26.00B||0.06%|
|SDY||SPDR S&P Dividend ETF||$18.58B||0.35%|
|DVY||iShares Select Dividend ETF||$17.49B||0.39%|
|SCHD||Schwab U.S. Dividend Equity ETF||$10.38B||0.06%|
|DGRO||iShares Core Dividend Growth ETF||$8.80B||0.08%|
|FVD||First Trust Value Line Dividend Index Fund||$8.04B||0.70%|
|HDV||iShares Core High Dividend ETF||$7.35B||0.08%|
|IDV||iShares International Select Dividend ETF||$4.26B||0.49%|
|DON||WisdomTree U.S. MidCap Dividend Fund||$3.89B||0.38%|
While strategies may differ, performance among the various dividend-focused ETFs this year has been similar. The top 10 best-performing dividend ETFs, for instance, have year-to-date returns ranging from 22% to 28.4%—not a huge spread.
The First Trust Dorsey Wright Momentum & Dividend ETF (DDIV) leads the pack. The fund bolstered its returns by picking dividend stocks with the best price momentum.
Meanwhile, the VictoryShares Dividend Accelerator ETF (VSDA) is another one on the list. It’s a fund that looks for dividend-growth stocks, but rather than look at history, it uses 15 fundamental and technical metrics to gauge which stocks will increase their payouts.
The aforementioned VIG, the largest dividend ETF of all, rounds out the top three on the best-performing dividend ETF list.
Best-Performing Dividend ETFs
Dividend ETFs have seen solid inflows this year. The 10 most popular funds based on inflows have gathered a combined $14.9 billion on a year-to-date basis.
Unsurprisingly, VIG headlines the inflows list, with $3.4 billion of fresh cash from investors. The fund’s time-tested dividend growth strategy has resulted in solid gains, and that’s resonating with investors.
Another Vanguard fund, the aforementioned VYM—which tracks high-yield stocks—also makes the top inflows list, with creations of $1.8 billion. VYM is a favorite for those seeking solid yield that is almost double what you can get in the 10-year Treasury.
The iShares Core Dividend Growth ETF (DGRO), the First Trust Value Line Dividend Index Fund (FVD) and the Schwab U.S. Dividend Equity ETF (SCHD) round out the top five dividend flow recipients for 2019.
Dividend ETFs With The Largest Inflows