Ben Johnson: Much like Converse All-Stars, dividend ETFs never seem to go out of style. But choosing the right ones can be tricky, especially as there are now more than 140 of them on the menu.
The trio I’ll be talking about today share a few common traits: They are low cost; they track sensibly constructed indexes that aim to either maximize dividend durability, dividend yield, or attempt to balance both; and they are backed by firms who have got investors’ backs.
The first ETF on my list is a long-time dividend fan favorite: Vanguard Dividend Appreciation ETF, which trades under the ticker VIG. The fund carries a Morningstar Analyst Rating of Gold.
VIG tracks the S&P Dividend Growers Index. The benchmark zeroes in on U.S. stocks that have grown their dividends for at least 10 years in a row. It then weeds out the 25% highest-yielding stocks that pass this test in an effort to sidestep potential value traps, but then weights those that are left by their float-adjusted market capitalization.
3 Excellent Dividend-Stock ETFs
These ETFs earn a Morningstar Analyst Rating of either Gold or Silver.
- Vanguard Dividend Appreciation ETF VIG
- Schwab U.S. Dividend Equity ETF SCHD
- Vanguard International High Dividend Yield Index ETF VYMI
Screening for durable, growing dividends yields a sturdy portfolio of industry titans like Microsoft MSFT, United Health Group UNH, and Johnson & Johnson JNJ. Investors in this portfolio may forego current dividend yield in hopes of above-average future dividend growth. The stability of the franchises it invests in means that it will hold up better in tough markets and lag during rallies. Indeed, for the year to date in 2022, the fund has outperformed the Morningstar U.S. Markets Index by 5 percentage points.
The second ETF on my list is another popular choice among dividend aficionados. Schwab U.S. Dividend Equity ETF trades under the ticker SCHD and has a Morningstar Analyst Rating of Silver.
SCHD tracks the Dow Jones U.S. Dividend 100 Index, which holds 100 stocks that have paid dividends for at least 10 consecutive years and appear healthy enough to continue their streak. Unlike VIG, SCHD introduces a dividend yield filter into its stock-selection process, that selects stocks based on high yield. But selecting stocks in this way can also increase risk. Fortunately, the fund’s fundamental requirements tend to keep it out of trouble.
Adding a dash of yield gives SCHD a value bent, which has been a boon to investors in recent months as markets have tumbled and value stocks have proven relatively resilient. While the Morningstar U.S. Markets Index had dropped 18.2% for the year to date through May 24, SCHD shed just 5.2% of its value.
My third and final pick from the crop of dividend-focused ETFs goes searching oversees for equity income.
Vanguard International High Dividend Yield Index has a lot to like. The ETF trades under the ticker VYMI and we’ve awarded it a Morningstar Analyst Rating of Silver.
VYMI strikes a favorable balance between pursuing stocks with high dividend yields and managing the associated risks, by leaning toward larger, more stable firms that should offer some downside protection.
The fund tracks the FTSE All-World ex U.S. High Dividend Yield Index. The index starts with large- and mid-cap stocks in the FTSE All-World ex U.S. Index, strips out REITs, and ranks them by their expected dividend yield over the next 12 months. The index then selects those stocks representing the higher-yielding half of eligible dividend-paying universe. Focusing on dividend yield gives the portfolio a value orientation and can be a source of risk. High yields can often stem from stocks with deteriorating fundamentals, depressed share prices, or (in all likelihood) some combination of both.
VYMI tries to control its exposure to risky stocks. Sweeping half of the dividend-paying universe into its portfolio diversifies stock-specific risks and limits the impact of distressed firms. It also weights constituents by their market cap, an approach that emphasizes larger, more-stable firms that should have the capacity to continue making dividend payments. Many of these large dividend-payers are profitable businesses, like Roche RHHBY, Toyota TM, and Shell RDS.A.
For investors looking to add a dash of international diversification to their equity allocation with a dividend kicker, VYMI is a solid choice.
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