How To Find The Right Dividend ETF

by on January 21, 2010 | Updated November 30, 2012

Value investing is one of the oldest and most popular equity strategies, mastered by legendary investors like Warren Buffett and Benjamin Graham and embraced by countless professional money managers and individual investors. The rise of the ETF industry has presented investors in pursuit of superior dividend yields dozens of options, each offering a unique twist on value investing strategies [for more head-to-head looks at popular ETFs, sign up for our free ETF newsletter].

While some investors pursue value strategies regardless of the economic environment, others view dividend paying equities as the first level of safe haven investing. When mild signs of economic turmoil emerge, investors tend to gravitate towards stocks that provide a meaningful current return in lieu of those the offer potential for significant growth and capital appreciation. If more troubling signs emerge, assets tend to move further down the risk continuum into bonds and precious metals. Regardless of their specific goals, dividend hungry ETF investors have plenty of funds to choose from [see Actionable ETF Trading Idea].

Dividend Weighted ETFs

While the majority of exchange-traded equity products utilize market cap weighting methodologies, several other weighting strategies have become popular among investors as well. In addition to earnings weighting, revenue weighting, and equal weighting methodologies, WisdomTree offers a number of funds that employ dividend weighting techniques to determine fund holdings and allocations to individual securities.

The LargeCap Dividend Fund (DLN), for example, is based on the WisdomTree Large Cap Dividend Index which measures the performance of the large capitalization segment of the U.S. dividend-paying market. The index is dividend weighted to reflect the proportionate share of the aggregate cash dividends each component company is projected to pay in the coming year, based on the most recently declared dividend per share. As such, the fund will generally include only companies that pay cash dividends, and will give the biggest weighting to those stocks that make the dividend payout (see more information on DLN’s fact sheet).

In addition to large cap domestic equities, WisdomTree offers dividend-weighted ETFs focusing on domestic small and mid caps, diversified international equities of all sizes (DOL, DIM, DLS), Japan (DXJ and DFJ), emerging markets (DGS), and the Middle East (GULF).

Just as various fashion styles come in and out of favor, the effectiveness of various investment strategies will inevitably ebb and flow. Last year was the year of the mid caps and growth investing, as these groups of equities outperformed their peers as stock markets staged impressive rallies after hitting bear market lows in March. As equity markets rebounded, dividend paying equities lost a bit of their luster, and dividend-weighted ETFs lagged behind their market cap-weighted and earnings-weighted peers [see Free 7 Simple & Cheap All-ETF Portfolios].

While WisdomTree has the most complete line of ETFs designed to offer exposure to dividend-paying companies, there are more than a dozen funds from other issuers that offer similar exposure.

Dividend Paying ETFs
Ticker SEC Yield Annual Dividend Yield Expense Ratio Number Of Holdings % U.S.
CVY 5.3% 5.2% 0.60% 150 100%
HGI 4.6% 4.4% 0.65% 154 15%
DEM 4.1% 3.7% 0.63% 239 0%
PFM 2.4% 2.2% 0.50% 199 100%
PEY 3.9% 4.0% 0.50% 50 100%
PID 3.3% 3.2% 0.50% 64 14%
FDD 6.9% 5.3% 0.60% 31 0%
FGD 5.6% 4.9% 0.60% 101 14%
FDL 3.9% 3.5% 0.45% 99 100%
FVD 2.9% 2.8% 0.70% 175 100%
IDV 5.8% 5.2% 0.50% 101 0%
DVY 3.5% 3.5% 0.40% 101 100%
DWX 6.7% 6.8% 0.45% 99 0%
SDY 2.9% 3.2% 0.35% 81 100%
VYM 3.3% 3.0% 0.13% 437 99%
VIG 2.3% 2.1% 0.13% 134 100%
HDV 3.6% 3.3% 0.40% 76 100%
DLN 3.0% 3.4% 0.28%  295 100%
DTN 4.0% 4.6% 0.38%  86 100%
DGS 3.5% 3.3%  0.64% 532 0%
SCHD  3.1% 2.4% 0.07% 100 100%
DHS  4.1% 4.4% 0.38%  336 100%
DWM  4.0% 3.7% 0.48% 700 0%
DES 3.9% 4.1% 0.38% 604 100%
DON  3.3% 3.4% 0.38% 351 100%
DOO  4.7% 4.7% 0.58% 91 0%
EDIV  7.1% 6.0% 0.59% 99 0%
DTD  3.1% 3.4% 0.28% 900 100%
Source: Issuer web sites as of 11/30/2012

Guggenheim Dividend ETFs

Guggenheim offers several ETFs designed to deliver meaningful current returns to investors, including both pure equity funds and products that invest in multiple asset classes. These include:

Multi-Asset Income ETF (CVY)

This ETF tracks an index designed to select a diversified group of securities with the potential to outperform the Dow Jones U.S. Select Dividend Index. The Index is comprised of approximately 125 to 150 securities selected from a universe of domestic and international companies, including U.S.-listed common stocks, ADRs paying dividends, REITs, MLPs, closed-end funds and traditional preferred stocks (see more fundamentals of CVY).

International Multi-Asset Income ETF (HGI)

This ETF is similar to CVY, but invests primarily in global companies and has minimal exposure to U.S. securities. The largest weightings are given to the UK, Canada, and France. HGI also invests in multiple emerging economies, including Mexico and Brazil (see more on HGI’s holdings page).

PowerShares Dividend ETFs

PowerShares offers three ETFs designed to offer exposure to dividend paying companies of all sizes and nationalities:

Dividend Achievers Portfolio (PFM)

This ETF is linked to the Broad Dividend Achiever Index, a benchmark that is designed to identify a diversified group of dividend paying companies that have increased their annual dividend for ten or more fiscal years. Companies meeting this requirement include several mega-cap blue chips, such as Wal-Mart, Johnson & Johnson, Exxon Mobil, AT&T, General Electric, and IBM.

High Yield Equity Dividend Achievers Portfolio (PEY)

PEY is based on the Dividend Achiever 50 Index, a benchmark composed of stocks selected primarily on the basis of dividend yield and growth in dividends. Compared to PFM, this ETF has a much heavier tilt towards small and mid cap stocks, with large cap companies accounting for only about 20% of holdings. PEY recently had a dividend yield of about 4.3% (see charts of PEY here).

International Dividend Achievers Portfolio (PID)

Similar to the PowerShares funds highlighted above, PID is designed to replicate the performance of a benchmark comprised of dividend paying stocks. In order to be eligible for inclusion, companies must have increased their dividends for five or more consecutive fiscal years. As the fund name suggests, this ETF maintains a global focus, investing in both domestic and non-U.S. stocks.

First Trust Dividend ETFs

First Trust, another Chicagoland ETF issuer known for its enhanced index products, offers a number of dividend ETFs focusing on a variety of different markets:

Dow Jones STOXX European Select Dividend Index Fund (FDD)

This ETF is based on a dividend weighted index composed of 30 stocks selected from the Dow Jones STOXX 600 Index that includes high dividend yielding companies across 18 European countries. The universe of eligible companies includes stocks that have a positive five-year dividend per share growth rate and a dividend to earnings-per-share ratio of 60% or less.

Dow Jones Global Select Dividend Index Fund (FGD)

This ETF maintains a broader scope than FDD, with all component companies of 24 developed market country benchmarks comprising the index universe. In order to be eligible for inclusion, companies must: 1) pay a current dividend, 2) have a current-year dividend-per-share ratio that is greater than or equal to its five-year average annual dividend-per-share ratio, and 3) have a five-year average payout ratio of less than or equal to 60% for U.S. and European companies; or less than or equal to 80% for all other countries.

Morningstar Dividend Leaders Index Fund (FDL)

FDL tracks a benchmark composed of stocks that have shown dividend consistency and dividend sustainability, as identified through a proprietary, multi-step screening process. FDL’s largest holdings consist of several mega cap stocks, including AT&T, Merck, Verizon, and Kraft.

Value Line Dividend Index Fund (FVD)

The index underlying this ETF relies on both Value Line rankings and distribution yields to determine component companies. From stocks given a ranking of #1 or #2 using the Value Line Safety Ranking System, those with a higher than average dividend yield are selected for inclusion. Dividend yields higher than the S&P 500 qualify as above average.

iShares Dividend ETFs

Not surprisingly, iShares offers two of the most popular dividend ETF options, including one fund limited to domestic stocks and another with an international focus.

Dow Jones International Select Dividend Index Fund (IDV)

This ETF tracks the Dow Jones EPAC Select Dividend Index, a benchmark that consists of equities from more than a dozen developed economies that provide relatively high dividend yields on a consistent basis over time. IDV’s largest sector allocations are given to financials, industrials, and utilities, a common occurrence among dividend funds (see technical analysis of IDV here).

Dow Jones Select Dividend Index Fund (DVY)

Linked to the Dow Jones U.S. Select Dividend Index, this ETF invests in about 100 companies that are screened by dividend per share growth rate and dividend payout percentage and selected based on dividend yield.

Other Dividend ETF Options

Beyond these funds, there are several additional ETF options for the dividend seeking investor:

  • ELEMENTS Dogs Of The Dow (DOD): This ETN is linked to the Dow Jones High Yield Select 10 Total Return Index, a subset of the Dow Jones Industrial Average. Each December, the thirty stocks in the Dow Jones Industrial Average are ranked by indicated annual dividend yield. The ten stocks with the highest indicated annual dividend yield are then selected as Index components.
  • SPDR S&P Dividend ETF (DWX): This ETF offers exposure to approximately 100 dividend-paying companies around the world, investing in more than two dozen countries.
  • SPDR S&P Dividend ETF (SDY): Linked to the S&P High Yield Dividend Aristocrats Index, this ETF is comprised of the 50 highest dividend yielding constituents of the S&P Composite 1500 Index that have increased dividends for at least 25 consecutive years.
  • Vanguard High Dividend Yield ETF (VYM): This ETF is one of the cheapest options for gaining exposure to dividend paying companies, charging an expense ratio of just 0.20%.
  • Vanguard Dividend Appreciation ETF (VIG): This ETF track the performance of a benchmark index that measures the investment return of common stocks of companies that have a record of increasing dividends over time. VIG charges an expense ratio of 0.24%.

[For more in-depth ETF analysis consider trying out a free seven day trial of ETFdb Pro.]

Disclosure: No positions at time of writing.