Despite whatever interest rates are doing, there’s still plenty of appeal when it comes to dividend investing. After all, dividends, and the potential reinvestment of those dividends, have been a major source of stock returns throughout history. And with the current favorable tax treatment of dividends, their appeal grows ever stronger for those investors needing income today. That could explain why investors continue to flock to dividend ETFs.
However, despite the fact that there are roughly 90 dividend ETFs, the vast bulk of investor money lies with a trio of funds: the iShares Select Dividend (DVY ), the Vanguard Dividend Appreciation ETF (VIG ), and the SPDR S&P Dividend ETF (SDY ).
Not that there is anything wrong with this trio of funds, but given the breadth of new products, especially those smart-beta indexes that use screens to craft better portfolios, investors may be shortchanging themselves when it comes to dividend ETFs. Here are eight unique dividend ETFs to consider.
Screening for Dividends
One of the hallmarks of the smart-beta movement is using various screens to choose the fundamentals or factors that create better portfolios. By doing this, smart-beta proponents can craft superior indexes that will outperform their bread-and-butter market-cap indexed twins. The approach is similar to dividend-focused ETFs.
FlexShares Quality Dividend ETF (QDF ): One of the issues with many dividend ETFs is that they weight their holdings based solely on dividend yield. However, that means some high yielding (i.e. troubled stocks) get top billing. QDF hopes to circumvent this by focusing on “quality” dividends. The Northern Trust-sponsored ETF uses screens to weed out poor and stressed dividend stocks from its broad parent index-the Northern Trust 1250. Stocks chosen for the dividend ETF are based on expected dividend payments, profitability metrics, reliable cash flows/earnings and solid management criterion as well as other various fundamental factors. This creates a stronger portfolio of dividends that should outperform over the longer term.
First Trust Value Line Dividend ETF (FVD ): Financial publishing firm Value Line has been churning out investment research since the 1930s. Much of that stems from the firm’s propriety ranking system. FVD uses this research to construct its portfolio. The dividend ETF will first use Value Line’s Safety Ranking System and only include top-rated stocks. Secondly, FVD will kick out any stocks that yield less than the average for the S&P 500. The index is rebalanced monthly. By using its Value Line screens and high dividend yield requirements, investors in FVD are treated to safer and better quality stocks that yield more than expected.
AdvisorShares Athena High Dividend ETF (DIVI ): Your brain can play major tricks on you, especially when it comes to investing. Emotions can get the best of you and ultimately cost you some big returns. DIVI, which is actively managed by AthenaInvest, uses the power of your brain to make better investment decisions. The ETF looks at Behavioral Portfolio Management (BPM) or behavioral factors to build better portfolios. The ETF applies these BPM screens and looks for those stocks that have high dividend yields. DIVI is then dividend weighted.
Consistent Dividend Payers
One of the best ways to find great dividend stocks is to focus on those firms that have paid their dividends for many years-through good times and bad. Dubbed “divider achievers”, “aristocrats”, or other similarly fancy names, these firms have demonstrated that they have the goods to keep their payouts coming for a long time.
ProShares S&P 500 Dividend Aristocrats (NOBL ): NOBL tracks the upper echelon of these dividend payers. As the name implies, the ETF tracks the S&P 500 Dividend Aristocrats Index. These are firms that have paid a continuously higher and higher dividend for at least the last 25 years straight. This strict requirement will remove firms that fail to do so. As such, NOBL represents a portfolio of stocks that have proven themselves through multiple businesses and economic cycles. Investors get the cream of the crop when it comes dividend stocks.
PowerShares International Dividend Achievers ETF (PID ): Good dividend habits aren’t just limited to U.S. shores. There are plenty of international stocks that also have exhibited consistent dividend paying. PID tracks the NASDAQ International Dividend Achievers Index. These companies have increased their aggregate annual regular cash dividend payments consistently for at least each of the last five consecutive years. The key is that foreign dividends tend to be lumpy due to the fact they are set at percentage of profits. By selecting PID, investors get rid of that lumpiness and hone in on the firms that continuously grow earnings.
Volatility-Reducing Dividends
Another trait of many smart-beta ETFs is to focus on volatility reduction. Volatility of the stock market can actually reduce returns over the long term depending on how high or low the stock’s peaks and valleys are. Great dividends are meaningless if you lose more than the dividend in capital deprecation. Luckily, there are ways to avoid that effect.
PowerShares S&P 500 High Dividend ETF (SPHD ): SPHD tracks the S&P 500 Low Volatility High Dividend Index. This measure hones in on the 50 stocks in the benchmark S&P 500 that pay the highest dividends but also exhibit the lowest volatility in the index. Really high yielding stocks tend to have high volatilities as investors are constantly reevaluating their prospects. Low yielding stocks tend to have the opposite effect. SPHD finds a happy medium in the center by offering a chance to pick up some extra yield, while still reducing volatility.
Compass EMP U.S. EQ Income 100 Enhanced Volatility Weighted Index ETF (CDC ): The name may be a mouthful but CDC offers a unique and potentially game-changing strategy for investors. The dividend ETF tracks the CEMP U.S. Large-Cap High Dividend 100 Long/Cash Volatility Weighted Index, which is a measure of large-cap dividend payers with hedged downside risk potential. CDC will first screen for the 100 highest yielding stocks with low volatility. Easy enough. Next, the ETF imparts an exit/reinvestment strategy. Based on how the index is doing each month, CDC will either sell 75% of its holdings and move to cash or reinvest within the index. This feature provides investors with a high yield and capital protection if things get too wonky.
O’Shares FTSE US Quality Dividend ETF (OUSA ): Forget about his Shark Tank celebrity status, Kevin O’Leary’s OUSA ETF may be worth your while. The fund tracks the FTSE US Qual / Vol / Yield Factor 5% Capped Index, which is a measure of large- and mid-cap stocks that have certain “quality and low volatility” characteristics. The fund then adds a yield requirement to produce extra income. What investors are left with is a higher yielding portfolio (around 3.2% as of 8/17/2015) and one that will not jump around.
The Bottom Line
There are plenty of reasons to add a swath of dividends to your portfolio and the dividend ETFs provide an easy way to do just that. However, don’t just focus on the top three broad funds. With over 90 different ETFs to choose from, there are plenty of choices to do better than just the bread-and-butter indexes. The preceding were just some of the more compelling smart-beta options.
Disclosure: Author was long QDF.
