How to Find and Compare Dividend ETFs
Dividend exchange traded funds (ETFs) are structured to invest in a basket of stocks with above average dividend yields.
Because companies that offer the best dividend yields are often large and stable “blue chips,” dividend ETFs can also add balance to portfolios during times of uncertainty. Most strategies that emphasize investment income will incorporate dividends to some degree. With lower yields in bonds and other fixed income products, dividend stocks and ETFs have become even more attractive.
Beyond the normal diversification benefits that any mutual fund or ETF can provide, dividend ETFs are also diverse across different dividend strategies—they can include holdings that offer dividend consistency, dividend appreciation, or both. As is the case with dividends from individual stocks, dividends paid by ETFs can be reinvested or taken as investment income.
While some ETFs include “dividend” in their names and are marketed as such, plenty of others achieve high dividend yields just as a result of their investment strategies.
Although valuable for the investment income and stability they can provide, several major dividend ETFs have recently underperformed the broader market, as seen in the chart below. This trend has formed because dividend-paying companies usually align with value strategies, but growth stocks have largely led the market since the ‘08 Financial Crisis. For more info, read our value vs. growth stocks blog or see the Best Performing Dividend ETFs screen template below. Jump to ‘Using YCharts to find Dividend ETFs’
The benefits of dividend ETFs
Equity income is the primary benefit of high yield dividend ETFs. After all, dividends are meant to provide current income to company shareholders. But beyond income, dividend ETFs can provide portfolio stability, diversification, and usually lower than average fees.
Dividends and stability sometimes come as a package. Blue chip industry leaders like Procter & Gamble (PG), Verizon (V) and Pfizer (PFE) are stable investments because of their long track records and corporate profits. But their ability and willingness to pay dividends to shareholders also contributes to their images of stability. Top holdings for Vanguard High Dividend Yield ETF (VYM) are shown below.
While most dividend paying companies skew toward large or mega-cap designation, some dividend ETFs can offer diversification across market capitalizations. In fact, while some dividend ETFs use basic strategies that simply select dividend-payers from the S&P 500, more advanced strategies will add sector tilts, focus on emerging markets, or invest in small cap stocks that pay dividends.
Finally, because a strategy that targets dividend yield is relatively basic and easy to employ, expense ratios for dividend ETFs tend to be below average, and rival fees of index ETFs. Some dividend ETFs carry management expense ratios lower than 0.1%.
Important metrics to track for dividend ETFs
These are the most important factors to consider when evaluating dividend ETFs and their holdings, or comparing several ETFs against each other.
Dividend Yield: the sum of all dividends paid annually, divided by current share price; a higher dividend yield is better
Dividend Payout Ratio: the percentage of company net income paid as dividends to shareholders; a higher dividend payout ratio is better
Dividend Growth: period over period growth of dividends paid, usually expressed as trailing twelve month (TTM) growth; higher dividend growth is better
Dividend Consistency: the track record of paying dividends to shareholders at a regular interval, usually quarterly, over a given lookback period; a company cutting or canceling a dividend payment is a negative, but dividend ETFs with plenty of holdings can mitigate that risk
Total Returns: unlike price return, total return includes both security price appreciation and income from dividends; a higher total return is better
Expense Ratio: the percentage of fund assets that shareholders pay as management fees and operating expenses; a lower expense ratio is better (luckily, dividend ETFs tend to have relatively lower expenses)
Market Cap Allocation: the percentage of fund assets invested in large-cap, mid-cap and small-cap stocks; greater exposure to large-cap companies is likely preferred by dividend investors
Current Yield: a fund’s annual interest income from bond holdings, divided by current share price; while dividends come from equity holdings, an equity-bond blend fund may also provide interest income and be relevant for income-seeking investors.
Using YCharts to find Dividend ETFs
Several YCharts tools and pre-built templates enable you to find high yield dividend ETFs and make more informed comparisons of dividend ETFs. Below are a few examples.
YCharts Fund & ETF Screener
As noted previously, some dividend ETFs have underperformed the broader market in recent years. Here’s how YCharts helps you find high yield dividend ETFs that outperform their peers.
The Fund Screener’s Top Performing Dividend ETFs is one of many pre-built screens available on YCharts. This template locates equity ETFs with above average dividend yields and total returns over several lookback periods, below average management fees, and a track record of consistent dividend payments. Some top results from that template screen are shown below, sorted by dividend yield.
Dividend Growth ETFs: YCharts gives you access to proprietary lists that identify dividend ETFs that have consistently paid dividends, or have regularly grown their dividends over time. Using the YCharts Fund Screener, click Modify, then Dividend Policies and select Dividend Growth or Dividend Consistency.
Monthly dividend ETFs: Most ETFs distribute dividend income on a quarterly basis, but if you’re looking for more frequent income, there are ETFs that pay monthly dividends. Using the Fund Screener, click Modify, then Dividend Policies and select Monthly Dividend Frequency.
Fund Comparison Reports
Comparison PDF Reports analyze and compare portfolios, mutual funds and other securities using clean and client-friendly visuals in a PDF format, and are customizable with your firm’s logo, colors and disclosures.
Use the Equity Exposure Comparison Report to examine the performance, key metrics and holdings of two dividend ETFs, like the Vanguard High Dividend Yield ETF (VYM) and BlackRock iShares Select Dividend ETF (DVY). VYM has outperformed recently, but DVY carries the higher dividend yield.
Evaluate Dividend ETFs faster with Pre-built Quickflows
YCharts Quickflows leverage already powerful tools and data to conduct higher quality research in less time. Based on investment research best practices and the most common workflows, our Quickflows blog shares more details on how to automate your analyses.
The Tax Adjusted Return Comparison Quickflow evaluates up to 12 ETFs for total return, tax cost ratio, and tax adjusted total return over several time periods. Because investors face income tax for dividends collected, this pre-built analysis helps you find dividend ETFs that outperform net of taxes paid. Click here to see the Quickflow’s results for several dividend ETFs.
Similarly, the Equity Style Exposure Quickflow compares holdings of multiple ETFs based on their allocations to Morningstar’s nine equity style boxes. Click here to see an example.
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