Following the Fed’s aggressive rate cut in mid-September, we believe many advisors are rethinking how they are providing stable income for client portfolios. High-dividend-yielding equity investments are likely to get closer looks in the fourth quarter after strong recent performance.
Advisors can certainly buy individual dividend-paying stocks. However there is always a risk of a company’s dividend being cut or the stock declining for other reasons. We think dividend ETFs offer the benefits of owning several dozen stocks to spread around the income stream and reduce the risks.
There are two main types of these ETFs – those primarily focused on growth and those primarily focused on yield. Current income tends to be higher and volatility tends to be lower for the latter group as the yield is part of the construction process. However there are differences between what you will find inside ETFs with a high dividend focus. Let’s look at a few ETF examples.
iShares Drills Into Energy
The iShares Core High Dividend ETF (HDV ) recently had 26% of its assets in energy stocks, with above-average stakes in health care (19%) and consumer staples (19%) too. The fund’s top-10 holdings include AbbVie, Chevron, Coca-Cola, Exxon Mobil, Merck, and Philip Morris International. Among the larger sectors in the broader market, financials (4.4%) and industrials (2.5%) exposure are relatively small. HDV owns no real estate investments.
Year-to-date through September 20, HDV was up 17.6%.
State Street Has Made Real Estate a Dividend Home
The SPDR Portfolio S&P 500 High Dividend ETF (SPYD ) recently had 25% invested in real estate companies like Public Storage and Ventas. They are joined by utilities (17%) and financials (16%) like Citigroup and Entergy. Unlike HDV, SPYD does not favor energy companies. Indeed, the sector comprises only 4.8% of fund assets.
Year-to-date through September 20, SPYD was up 17.7%.
ALPS Treats All the Dogs Equally
The ALPS Sector Dividend Dogs ETF (SDOG ) equally weights the five highest dividend yielding stocks in the S&P 500 across ten sectors. It excludes real estate and is reconstructed annually. The range of sector exposure is minimal with financials recently at 10.2%, consumer staples at 9.6% and eight others in between. Holdings include Corning, Darden Restaurants, Exxon Mobil, Regions Financial, and Stanley Black & Decker.
Year-to-date through September 20, SDOG was up 16.7%.
Fidelity’s Dividend Approach Tilts to Technology
The weighting approach for the Fidelity High Dividend ETF (FDVV ) is primarily based on dividend yield. However, there is also a dividend growth aspect and the fund’s focus is to be representative of the broader market. This helps explain why there is a 25% stake in information technology stocks. This more growth-oriented sector is joined by industrials (16%), consumer staples (12%) and utilities (10%) as FDVV’s largest. Holdings include Apple, Broadcom, Microsoft, NextEra Energy, and Procter & Gamble. FDVV also has a 9% position in the real estate sector.
Year-to-date through September 2020, FDVV was up 20.2%
While the performance has been strong for many dividend-yielding ETFs, what’s inside them is different. Take advantage of one of the benefits of ETF investing and look inside the fund before investing or reinvesting.
For more news, information, and analysis, visit Vettafi | ETFDB.
