Using Dividend ETFs For Income

As interest rates fall close to record lows, investors are increasingly using dividend ETFs to generate income.
 

sumit
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Senior ETF Analyst
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Reviewed by: Sumit Roy
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Edited by: Sumit Roy

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:

TickerFundAUMExpense Ratio
VIGVanguard Dividend Appreciation ETF$38.83B0.06%
VYMVanguard High Dividend Yield ETF$26.00B0.06%
SDYSPDR S&P Dividend ETF$18.58B0.35%
DVYiShares Select Dividend ETF$17.49B0.39%
SCHDSchwab U.S. Dividend Equity ETF$10.38B0.06%
DGROiShares Core Dividend Growth ETF$8.80B0.08%
FVDFirst Trust Value Line Dividend Index Fund$8.04B0.70%
HDViShares Core High Dividend ETF$7.35B0.08%
IDViShares International Select Dividend ETF$4.26B0.49%
DONWisdomTree U.S. MidCap Dividend Fund$3.89B0.38%

Similar Returns

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

TickerFundYTD Return (%)
DDIV First Trust Dorsey Wright Momentum & Dividend ETF28.35
VSDA VictoryShares Dividend Accelerator ETF25.63
VIG Vanguard Dividend Appreciation ETF23.88
RDVY First Trust Rising Dividend Achievers ETF23.38
TDIV First Trust NASDAQ Technology Dividend Index Fund23.26
IHDG WisdomTree International Hedged Quality Dividend Growth Fund23.09
LEAD Reality Shares DIVCON Leaders Dividend ETF22.99
DNL WisdomTree Global ex-US Quality Dividend Growth Fund22.78
YLDE ClearBridge Dividend Strategy ESG ETF22.50
DIVB iShares U.S. Dividend and Buyback ETF21.95

 

Strong Inflows

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

TickerFundYTD Inflows ($million)
VIGVanguard Dividend Appreciation ETF3,412
DGROiShares Core Dividend Growth ETF2,803
FVDFirst Trust Value Line Dividend Index Fund2,798
VYMVanguard High Dividend Yield ETF1,848
SCHDSchwab U.S. Dividend Equity ETF1,494
SPYDSPDR Portfolio S&P 500 High Dividend ETF836
SPHDInvesco S&P 500 High Dividend Low Volatility ETF700
DONWisdomTree U.S. MidCap Dividend Fund467
DGSWisdomTree Emerging Markets SmallCap Dividend Fund296
VYMIVanguard International High Dividend Yield ETF264

 

Email Sumit Roy at [email protected] or follow him on Twitter @sumitroy2

Sumit Roy is the senior ETF analyst for etf.com, where he has worked for 13 years. He creates a variety of content for the platform, including news articles, analysis pieces, videos and podcasts.

Before joining etf.com, Sumit was the managing editor and commodities analyst for Hard Assets Investor. In those roles, he was responsible for most of the operations of HAI, a website dedicated to education about commodities investing.

Though he still closely follows the commodities beat, Sumit covers a much broader assortment of topics for etf.com, with a particular focus on stock and bond exchange-traded funds.

He is the host of etf.com’s Talk ETFs, a popular video series that features weekly interviews with thought leaders in the ETF industry. Sumit is also co-host of Exchange Traded Fridays, etf.com’s weekly podcast series.

He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing chess and snowboarding in Lake Tahoe.