Using Dividend ETFs For Income

October 21, 2019

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:

Ticker Fund AUM Expense Ratio
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%

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