Today we take a close look at some of the most popular dividend ETFs to see if they are right for you.
Unlike our last article on S&P 500 index funds, which all hold mostly the same stocks, these dividend funds will vary quite a bit on their holdings so read the fund’s prospectus carefully before investing.
Dividend funds are gaining in popularity, and who can blame investors? Bond yields are hovering around all time lows and historically dividend paying stocks have outperformed the S&P 500 by 2.5% annually, and outperform non dividend paying stocks by 8% according to Ned David Research.
There are a lot of funds to choose from, all of which are just a little bit different.
At first glance it is difficult to decide between these funds. You investment choice largely depends what you are looking for in an investment. Are you looking for companies with a history of increasing dividends, but with a small current yield? Or companies with high dividend yields now but potentially deteriorating balance sheets? Small cap companies with growing dividends? Large cap stocks?
I can’t answer all those questions for you, what I can do is try to clearly detail what each one of the funds below invests in and compare their historical returns and volatility. Some are more volatile while some will cushion you better against market declines.
To start off we look at ETFs organized by fund family with discussions, charts and analysis on all the differences of the funds at the end.
Vanguard Dividend ETFs:
Vanguard customers will be able to buy and sell these ETFs commission free, and they also offer the lowest expense ratios for dividend ETFs in the industry. TD Ameritrade customers also trade these 2 ETFs commission free.
Vanguard offers 2 specific dividend ETFs:
*VIG – Vanguard Dividend Appreciation ETF
Quick Facts:
– 2.3% Dividend yield
– Quarterly dividend distributions
– Tracks the Dividend Appreciation Index
– 0.13% Expense Ratio
At first glance, it is easy to pass over this fund because of its relatively low yield compared to the other funds we are spotlighting. But it is important to understand the index that this fund tracks. The fund tracks the Dividend Appreciation Index, which only includes companies that have increased their dividends each year for the past 10 years! They may sacrifice some yield right now but by investing in this fund you will be invested in solid companies that have been able to consistently raise their dividend, even through the 2008 – 2009 recession!
The companies that make up Vanguard’s Dividend Appreciation ETF are mostly large cap stocks. The top ten holdings are shown below:
VIG’s webpage is here: https://personal.vanguard.com/us/funds/snapshot?FundId=0920&FundIntExt=INT
VIG’s prospectus is here:
VYM – Vanguard High Dividend Yield ETF
Quick Facts:
– 3.25% Dividend yield
– Quarterly dividend distributions
– Tracks the FTSE High Dividend Yield Index
– 0.13% Expense Ratio
This ETF is targeting companies that currently have an above average yield, are expected to pay a dividend within 12 months are non-REIT (Real Estate Investment Trusts).
VYM’s top 10 holders are shown below:
VYM’s webpage is here: https://personal.vanguard.com/us/funds/snapshot?FundId=0923&FundIntExt=INT#hist=tab%3A0
And VYM’s prospectus is here:
We can see comparing the holdings that this fund invests based on current yield, rather than history of increasing dividend as VIG does. That strategy gives VYM a very nice dividend yield of 3.25% with an industry low expense ratio of only 0.13%
How do VIG and VYM compare? Let’s look at each fund’s performance over the past 5 years compared to the S&P 500 index:
The first thing this chart reiterates is not to buy funds based on their dividend alone. Although VYM has a dividend yield nearly a full percentage point high than VIG, VIG has outperformed by nearly 10% over the last 5 years!
VIG’s out performance is due to investor’s “flight for safety”, purchasing high quality names with strong balance sheets since the 2008-2009 recession. After all, what is a stronger statement of fiscal strength than raising your dividend during each of the last 10 years, during the worst economy since the great depression?
Also a quick comparison of VIG and VYM’s fundamentals:
|
|
Vanguard Dividend Apprec ETF (VIG) |
Vanguard High Dividend Yield ETF(VYM) |
| Number of stocks | 133 | 434 |
| Median market cap | $43.5 billion | $93.2 billion |
| Price/earnings ratio | 15.4x | 15.1x |
| Price/book ratio | 3.1x | 2.3x |
| Return on equity | 23.20% | 19.80% |
| Earnings growth rate | 7.70% | 3.70% |
| Foreign holdings | — | 0.20% |
| Turnover rate | 14.40% | 16.50% |
From a very quick glance, companies in VIG are smaller, growing faster and slightly more expensive in terms of book value and P/E than those in VYM.
Will VIG’s superiority continue? Of course no one knows for sure, but I think it is safe to say that as long as markets remain jittery and on edge, expect the type of companies within VIG to be hoarded by investors looking for safety.
SPDR Dividend ETFs:
SPDR offers one domestic dividend fund.
SDY – SPDR S&P Dividend ETF:
Quick Facts:
– 3.17% Dividend Yield
– Quarterly Dividend Distributions
– Tracks the S&P High Yield Dividend Aristocrats Index
– Expense Ratio of 0.35%
SDY’s top ten holdings:
SDY’s website is here:
https://www.spdrs.com/product/fund.seam?ticker=SDY
SDY’s prospectus is here:
https://www.spdrs.com/library-content/public/SDY%20SUM%20PRO%20color.pdf
SDY tracks the S&P High Yield Dividend Aristocrats Index, which consists of companies within the S&P Composite 1500 that have increased dividends every year for at least 20 years. No easy task for a company! In fact, at the time of writing only 81 companies make the cut.
SDY seems to compare more closely to VIG based on its screen for historical dividend appreciation. How do these funds compare?
|
|
SPDR S&P Dividend ETF (SDY) |
Vanguard Dividend Apprec ETF (VIG) |
| Number of stocks | 81 | 133 |
| Median market cap | $15.5 billion | $43.5 billion |
| Price/earnings ratio | 16.4x | 15.4x |
| Price/book ratio | 2.4x | 3.1x |
| Return on equity | — | 23.2% |
| Earnings growth rate | 2.8% | 7.7% |
| Foreign holdings | — | — |
| Turnover rate | 94.0% | 14.4% |
SDY gives you smaller companies with a longer history of dividend appreciation and a higher yield. However SDY also has a higher expense ratio and consists of companies that have not been growing earnings nearly as fast.
Since inception, VIG has outperformed SDY. VIG seems to be investing in a great niche of stocks currently, capturing growth along with increasing dividends. For beginning investors who can afford to give up a little yield in place for capital appreciation, VIG has historically been the best fit.
iShares Dividend ETFs:
DVY – Dow Jones Select Dividend Index Fund:
Fidelity customers can buy and sell DVY commission free.
Quick Facts:
– 3.57% Dividend Yield
– Quarterly Dividend Distributions
– Tracks the Dow Jones U.S. Select Dividend Index
– Expense Ratio of 0.40%
The Dow Jones U.S. Select Dividend Index is made up of 100 companies screened for yield, dividend payout ratio, dividend growth and liquidity.
DVY’s website is found here: http://us.ishares.com/product_info/fund/overview/DVY.htm
DVY’s prospectus can be found here:
HDV – High Dividend Equity Fund ETF:
Quick Facts:
– 3.52% Dividend Yield
– Quarterly Dividend Distributions
– Tracks the Morningstar Dividend Yield Focus Index
– Expense Ratio of 0.40%
The Morningstar Dividend Yield Focus Index consists of 75 companies that pay a dividend and pass several screens to determine the strength of its “economic moat”. A company’s economic moat means how well its business is protected and how much of a competitive advantage the company has. Morningstar based the idea off of an idea made popular by Warren Buffett many years ago. How a company’s economic moat rating is determined is discussed in much more detail by Morningstar here. http://www.morningstar.com/cover/videocenter.aspx?id=542541
One thing I noticed that makes me a little uneasy about this fund is the large allocation to the top holdings. As a potential investor, know that nearly 10% of your investment in this fund is in AT&T. As a general rule of thumb, I think no individual company should be more than 5% of your total portfolio. So if you are contributing a large portion of your investment dollars to this fund, ensure you do not become too overweight in any of these top holdings.
HDV’s website is found here:
http://us.ishares.com/product_info/fund/overview/HDV.htm
HDV’s prospectus is found here:
How have these iShares funds compared?
|
|
iShares High Dividend Equity Fund (HDV) |
iShares Dow Jones Select Dividend Index (DVY) |
| Number of stocks | 75 | 100 |
| Median market cap | $69.5 billion | $11.8 billion |
| Price/earnings ratio | 17.8x | 15.5x |
| Price/book ratio | 2.4x | 2.0x |
| Earnings growth rate | -5.10% | 4.50% |
| Foreign holdings | — | — |
| Turnover rate | 28.00% | 16.00% |
HDV is a newcomer to the scene and has outperformed DVY and the S&P 500. DVY has lagged the S&P 500 almost the entire previous 5 years.
Even with the out performance, I would be hesitant to invest significantly in this fund. HDV is not as diversified as any of the other funds we have compared so far, has one of the highest expense ratios and has limited history. Over 60% of the funds assets are within its top 10 holdings, and as I said before the weighting of the top few holdings are just way too high for me to be comfortable.
WisdomTree ETFs:
I have not given WisdomTree funds much of a look in the past. They offer a large number of funds with decent expense ratios and most are commission free for Etrade customers. However, these funds listed below lack liquidity compared to other funds we have talked about. Average volumes for WisdomTree’s funds listed below are under 80,000 shares traded daily. This is not a reason to avoid investing in the ETFs altogether, but as an investor it would make me a little nervous. If you are comfortable with the liquidity of these funds, they may be some great options.
DTD – WisdomTree Total Dividend Fund ETF:
Quick Facts:
– 3% Dividend Yield
– Quarterly Dividend Distributions
– Tracks the WisdomTree Dividend Index
– Expense Ratio of 0.28%
DTD’s website is found here:
http://www.wisdomtree.com/etfs/fund-details.aspx?etfid=40
DTD’s prospectus is here:
http://www.wisdomtree.com/resource-library/pdf/fundfacts/WisdomTree-FactSheet-DTD-108.pdf
DON – WisdomTree MidCap Dividend Fund ETF:
Quick Facts:
– 3.2% Dividend Yield
– Quarterly Dividend Distributions
– Tracks the WisdomTree MidCap Dividend Index
– Expense Ratio of 0.38%
DON’s website is here:
http://www.wisdomtree.com/etfs/fund-details.aspx?etfid=3
DON’s prospectus is found here:
http://www.wisdomtree.com/resource-library/pdf/fundfacts/WisdomTree-FactSheet-DON-110.pdf
DLN – WisdomTree Large Cap Dividend Fund ETF
Quick Facts:
– 2.91% Dividend Yield
– Quarterly Dividend Distributions
– Tracks the WisdomTree LargeCap Dividend Index
– Expense Ratio of 0.28%
DLN’s top 10 holdings include:
Comparing these ETFs:
|
|
WisdomTree Total Dividend Fund (DTD) |
WisdomTree MidCap Dividend Fund (DON) |
WisdomTree LargeCap Dividend Fund (DLN) |
| Number of stocks | 904 | 352 | 294 |
| Median market cap | $43.4 billion | $4.0 billion | $67.9 billion |
| Price/earnings ratio | 15.6x | 17.8x | 15.3x |
| Price/book ratio | 2.1x | 1.7x | 2.2x |
| Return on equity | — | — | — |
| Earnings growth rate | 3.40% | 6.40% | 3.20% |
| Foreign holdings | 0.00% | 0.20% | — |
| Turnover rate | 15.00% | 29.00% | 14.00% |
A direct side-by-side comparison for these ETFs may not be as useful as those compared above. DON invests in mid cap stocks, DLN invests in large cap stocks and DTD represents the entire market. What fund is best for you largely depends on your portfolio and volatility you want to be exposed to.
As expected DON, which includes much smaller companies, is more volatile. Under-performing during 2008 – 2009 and outperforming more recently.
Summary
A lot of information!
How do all these funds look together?
Once again Vanguard shows why it is taking the ETF industry by storm. Not only is it offering the 2 cheapest dividend ETFs, but they have out performed the others compared in this article over the last 6 years. Also worth noting, VIG is the only fund in this article which beats the S&P 500 index over the last 6 years. Of course historical returns are no guarantee of future results.
It is worth noting, most of VIG’s out performance comes from its performance in 2008-2009. The stocks that make up VIG are much less volatile and should outperform in a deteriorating market. Recently VIG has under performed most of these other funds as investors have been more likely to add “risk” in their portfolios (meaning companies with sub-par balance sheets, expected high growth rates and more volatility compared to companies that make up VIG).
I am also impressed with WisdomTree’s selection of funds, offering expense ratio less than all funds except those run by Vanguard. DTD in particular offers investors a very diversified selection of stocks (over 900), with a 3% yield.
Lastly, although yields on bonds are reaching all time lows and it may be tempting to reach for these funds for yield; they should only be considered part of your stock asset allocation. Recently, I have seen too many people adding dividend paying stocks to their portfolios in exchange for bonds. If you need to be 40% bonds, don’t use any of that asset allocation to invest in dividend paying stocks. Even the most stable of these funds can’t stand up to the capital protection that a good bond fund can offer. Don’t add risk to your portfolio just for a little yield.
Shown below is a comparison of BND (a bond fund offered by Vanguard) and VIG.
Bonds are in your portfolio for a reason. None of the funds mentioned are a replacement for bonds in your portfolio.
*At time of writing, I currently own VIG in my ROTH IRA. I have owned VIG since March 2012.
