Top US Dividend ETFs

U.S. equity dividend payouts slowed significantly in the third quarter, according to a report from Henderson Global Investors. On a headline basis, dividends dropped 7%, the worst showing since the introduction of the Henderson Global Dividend Index in 2009.

Stripping out unpredictable special dividends, U.S. dividends had a stronger showing in Q3, rising 3% year-over-year. But that was still the slowest pace of growth in seven years.

"The slowdown follows more subdued profit growth in the U.S. partly thanks to the stronger dollar, but it also reflects higher indebtedness at U.S. corporates, leading to greater caution on preserving cash flow," said the authors of the report.

However, they went on to say that they "do not see this as a major cause for concern" because "dividend growth in the U.S. had to return to a more sustainable rate after a couple of years of double-digit expansion."

Two Approaches For Dividend ETFs

In light of the latest news on dividends, now is a good time to check in on dividend ETFs. These were a hot area of the ETF universe as interest rates steadily fell to new lows; now the shine has come off them to some extent as rates have spiked higher.

Still, dividend exchange-traded funds remain popular, and on the whole, have performed well this year. These ETFs largely fall into two buckets―those that focus on stocks with high yields, and those that focus on stocks with a history of strong dividend growth.

Taking the latter approach is the biggest dividend ETF of them all, the $22.4 billion Vanguard Dividend Appreciation ETF (VIG). This ETF holds a market-cap-weighted index of companies with at least 10-consecutive years of increasing annual dividend payments.

VIG is an ETF designed for consistent dividend growth rather than high absolute yield. Its current distribution yield of just over 2% is close to that of the broader market, making it a poor choice for those looking for higher payouts.

For that, investors have to turn to a product like the Vanguard High Dividend Yield ETF (VYM), the second-largest dividend ETF with $16.5 billion in assets. This is an ETF that holds stocks of the highest-yielding half of the U.S. equity markets (excluding REITs) and market-cap-weights them. The result is a fund with a 2.9% yield, notably higher than the overall market.

As Vanguard explains, "[VYM] provides broad exposure to U.S. companies that are dedicated to consistently paying larger-than-average dividends. [However], the fund’s emphasis on slower-growing, higher-yielding companies [means] that its total return may not be as strong in a significant bull market."

Other Dividend ETF Giants

VIG and VYM nicely illustrate the two most popular dividend strategies used by ETFs. There are other funds that use different variations of these strategies, but the concepts are the same.

For example, the iShares Select Dividend ETF (DVY)―the third-largest dividend ETF, with $16.4 billion in assets―selects 100 stocks "by dividend yield, subject to screens for dividend-per-share growth rate, dividend payout ratio and average daily dollar trading volume."

The resulting basket of stocks is then weighted by indicated annual dividend. DVY has a current distribution yield of 3.1%.

Meanwhile, the No. 4 dividend ETF by assets, the $15 billion SPDR S&P Dividend ETF (SDY), takes the dividend-growth strategy to an extreme. SDY only holds stocks of companies that have followed "a managed-dividends policy of consistently increasing dividends every year for at least 20 years."

The ETF's current yield of about 2.4% is higher than the broader market.

Then there's the iShares Core High Dividend ETF (HDV), the fifth-largest U.S. dividend ETF, with $6.2 billion in assets. The ETF follows an index that screens for companies with sustainable competitive advantages and strong balance sheets. It then selects the 75 highest-yielding stocks from that group.

Currently, the ETF has a distribution yield of 3.5%.

Year-To-Date Returns

The aforementioned ETFs are only five of the many U.S.-focused (nonleveraged) dividend ETFs on the market today. Put up against all U.S. dividend ETFs, returns for VIG, VYM, DVY, SDY and HDV are toward the middle of the pack (funds focused on small-caps and midcaps have done better). Still, they are all handily beating the SPDR S&P 500 ETF Trust (SPY), which is up about 10% on the year.

See the table below for a full list of year-to-date returns for this segment:

Contact Sumit Roy at [email protected]