Call it the tyranny of choice, but investors looking for income via dividend exchange-traded funds have almost too many options to choose from these days.
A simple screen returns nearly 200 dividend-focused ETFs. How do go about finding the best ones?
It’s hard to believe that the Federal Reserve has been raising rates for nearly two years now. After all, savings and money market accounts still yield next to nothing, and even the 10-year Treasury barely yields 2.4%.
It’s still a rotten market out there for yield-hungry investors, which in my opinion explains why dividend ETFs keep sprouting up like weeds.
With a new Fed Chairman taking office early next year, there is a little more uncertainty than usual, and we want to be prepared.
Here are three dividend ETFs worth a look in my opinion, and link to many more down below.
iShares Select Dividend ETF (DVY)
Dividend investing really came back into style following the bursting of the tech bubble and the 2000-2002 bear market, and the iShares fund was the first ETF to jump on that trend.
DVY tracks the Dow Jones U.S. Select Dividend Index, which is composed of 100 of the highest-yielding stocks in the Dow Jones U.S. Index, excluding REITs.
In order to make the cut, a stock has to have had dividend growth over the past five years and must have an average dividend coverage ratio of at least 167% over the past five years.
The stocks should also have positive earnings over the past 12 months and should have a market cap of at least $1 billion with an average daily trading volume of at least 200,000 shares.
The goal is to limit the selection to high-quality companies that are unlikely to slash their dividends any time soon.
Vanguard High Dividend Yield ETF (VYM)
While there is certainly a little overlap between VYM and the iShares Select Dividend ETF, there are noteworthy differences. The Vanguard fund tracks the FTSE High Dividend Yield Index, which also excludes REITs.
Whereas DVY’s largest allocation is to the utilities sector (30.3% of the portfolio), VYM’s largest allocation is to technology, at 14.3% of the portfolio, with financials, health care and consumer goods close behind at just shy of 14% each.
VYM also spreads its bets a lot wider, holding over 400 stocks vs. DVY’s 100. So, while DVY slightly outpaces VYM in terms of raw dividend yield, VYM offers better diversification across sectors.
Interestingly, VYM’s largest holding is Microsoft Corporation (MSFT), not a company you might normally consider a “dividend stock.” But you’ll see plenty of other dividend standard-bearers in the top five, including Johnson & Johnson (JNJ), ExxonMobil Corporation (XOM), JPMorgan Chase & Co. (JPM) and Wells Fargo & Co (WFC).
Vanguard REIT ETF (VNQ)
In my opinion, up next is the Vanguard REIT ETF, which tracks the MSCI US REIT Index. A lot of mainstream dividend ETFs exclude REITs, as they are viewed as a separate asset class.
But in my opinion, an income portfolio that doesn’t include REITs just flat-out isn’t complete.
Landlording is a fine business to be in, and taxes are a big part of that. Because buildings throw off large amounts of non-cash expenses like depreciation, a portion of the dividend is often considered a non-taxable return of capital.
Furthermore, REITs pay no taxes at the corporate level so long as they distribute at least 90% of their profits as dividends.
Takeaway
REITs have had mixed performance over the past several years. Because real estate tends to be highly leveraged, investors have been fretting that hawkishness by the Fed would crimp REIT profits.
Furthermore, REITs in the retail sector have gotten slammed by fears that Amazon.com is making traditional brick-and-mortar retail obsolete. These jitters have kept REITs trapped in a two-year trading range, even while the broader stock market has been on fire.
In my view, REITs look like a steal at current prices. VNQ yields a fat 4.8% in dividends, and its expense ratio is a miniscule 0.12%. I consider VNQ to be one of the very best ETFs for any long-term income portfolio.
If you like to see other dividend ETFs that may be worth a look, check out this link. Happy investing in 2018.
(This article first appeared at InvestorPlace)
Photo Credit: Pictures of Money via Flickr Creative Commons
