As interest rates, after staying at elevated levels for some months, started to level off and drop, should investors switch from buying bonds, to focus on dividend yields again?
Below is a list of US large-cap dividend-focused exchange-traded funds that are worth monitoring, including their yields and what they contain. Plus we give our view on
Vanguard Dividend Appreciation, yield 1.72%
- (ticker: VIG, factsheet).
This dividend-focussed ETF has an expense ratio of just 0.06 percent. The fund tracks the S&P dividend growers index (link to index factsheet), which contains 338 number of constituents. Not only do all companies in the index paid out dividends every year, they increase the absolute payout. Chartwise, the Fund has been progressing steadily in an uptrend since 2008, establishing new all-time highs lately (see below). At the end of October, the Fund assets surpassed $100 billion, becoming one of the largest ETFs in the market. The top 3 holdings are: Apple (AAPL), Broadcom and Microsoft (MSFT).
iShares Core Dividend Growth 2.18%
- (DGRO, fund website).
The fund has an expense ratio of 0.08 percent and tracks the Morningstar US Dividend Growth index. According to the index factsheet, the index is designed to “provide exposure to securities in the Morningstar US Markets Index with a history of uninterrupted dividend growth and the capacity to sustain that growth”. In the portfolio, the top 3 constituents are JP Morgan, Exxon, and Chevron (CVX).
Vanguard High Dividend Yield 2.73%
- (VYM, factsheet)
VYM is another popular choice for investor. Like VIG, this Vanguard fund has an expense ratio of just 0.06 percent. But the fund holds a larger number of constituents, 538, with a median market cap of $14.2 billion. The index it tracks is the FTSE High Yield Index. At the end of October, the fund has $72 billion in assets under management. The three largest constituents are Broadcom (BRCM), JP Morgan (JPM) and Exxon Mobil (XOM).
iShares Select Dividend 3.35%
- (DVY, fund info)
The $20 billion fund tracks the Dow Jones U.S. Select Dividend Index (index link) The number of constituents of this ETF is much smaller than the funds above, only 38. The largest constituents are: Altria (MO), AT&T (T), and Philips Morris (PM).
iShares Core High Dividend 3.34%
- (HDV, fund info)
HDV is another fund with a tilt towards dividend-paying companies. The ETF, with 75 constituents, has the smallest assets under management in this list, with only $11 billion. It tracks the Morningstar Dividend Yield Focus Index, which according to the index factsheet, finds securities with “with attractive dividend yields and strong financial quality. Constituents are weighted in proportion to the value of their dividend payments.” The top 3 constituents are: Exxon, Chevron, and Johnson & Johnson (JNJ).
How Important Are Dividend ETFs In Portfolios?
In stock markets, investors often overlook the importance of dividends. Capital appreciation, the faster, the better, is often the sole parameter that many traders focus on.
Successful long-term investors, however, do not make that mistake. They focussed on growth and cash flow from the stocks they owned. In this regard, many having been buying the Vanguard Dividend Appreciation ETF since it owns a significant chunk of tech stocks. Its top 3 holdings are mega-caps technology firms.
In the last two years, the Magnificent Seven (a list of seven tech titans) has been powering the US stock market into uncharted territory. Any portfolio manager who avoided these elite, trillion-dollar companies would have a tough time narrowing the performance gap from the rest of the market. Investors know that. Hence ETFs that owns these companies are naturally sought by investors. Moreover, VIG balances the risk for investors by diversifying into 330 stocks. The fund grew into a $100-billion ETF.
The question now is, should we chase this ETF high? Yield for this ETF is far from ideal (sub 1.8 percent). In comparison, yields on smaller ETFs are higher. The iShares Core High Dividend, for example, yields twice as much as VIG. Plus, the VIG ETF has been marching higher for some months now. A correction, which is inevitable in stock markets, may pull the fund back to its long-term rising trend.
But predicting a rotation in financial market is notoriously difficult. Still, freeing up some cash at this point may not be a bad idea. This gives investors some firepower to buy VIG at better prices in the event of a market setback.
Jackson is a core part of the editorial team at GoodMoneyGuide.com.
With over 15 years industry experience as a financial analyst, he brings a wealth of knowledge and expertise to our content and readers.
Previously Jackson was the director of Stockcube Research as Head of Investors Intelligence. This pivotal role involved providing market timing advice and research to some of the world’s largest institutions and hedge funds.
Jackson brings a huge amount of expertise in areas as diverse as global macroeconomic investment strategy, statistical backtesting, asset allocation, and cross-asset research.
Jackson has a PhD in Finance from Durham University and has authored nearly 200 articles for GoodMoneyGuide.com.
You can contact Jackson at jackson@goodmoneyguide.com
