High Yield vs. Dividend Growth: Choosing Between the Two

One useful distinction is to break the dividend category into two sections: high yield and dividend growth.

High dividend yield ETFs, or “dividend yield ETFs,” seek out stocks paying out adequate dividends right away,. However, these stocks aren’t as likely to grow the size of that dividend over time.

Meanwhile, dividend growth ETFs select for stocks whose dividend payments may be more modest, but which have a track record of regularly increasing their dividends, making them attractive long-term investments.

Older investors and retirees will likely prefer high dividend yield ETFs. Current high yields have the advantage of providing a solid boost of income right away, rather than years or decades down the line.

But the highest-yielding stocks aren’t always the healthiest companies. In fact, sometimes a stock’s price can be low relative to their dividend payouts, due to financial distress, thus boosting the apparent size of its yield (note: dividend yield is a percentage calculated by dividing dividend by stock price). So selecting stocks on the basis of their dividend yield alone isn’t enough; other financial metrics should come into play.

Meanwhile, younger investors with time to sit on their investments will likely prefer dividend growth ETFs. Companies that have a history of increasing their dividend payouts are often growing, financially robust companies in a solid financial position to return cash to shareholders.

The downside, though, is that yields for dividend growth companies tend to be more modest. It may take a dividend growth stock several decades to surpass the dividend offered by a high-yield company.

That said, the strategies aren’t mutually exclusive. Miller/Howard founder Lowell Miller said the following in an interview with Barron’s: “You want a mix of both. If the yield on original investment is too high, it’s going to imply more risk than you’d like to take and reduced growth in the future. If a starting yield is too low, it requires a much higher growth rate or more time to get a decent yield.”

Investors seeking dividend yield ETFs can visit ETF Database’s list of the Top 100 Highest Dividend Yield ETFs, while those seeking top dividend growth ETFs can visit the Dividend Growth ETF List.

Currently, the ETF with the highest dividend yield is the Columbia Research Enhanced Value ETF (REVS), with a dividend yield of 23%.

Meanwhile, the top-performing dividend growth ETF is the ProShares S&P Midcap 400 Dividend Aristocrats ETF (REGL C+), which is up 17% year-to-date.

For more news, information, and strategy, visit the Dividend Channel.