5 Best Dividend Aristocrats ETFs for Income Investors
Best Dividend Aristocrats ETFs
The “dividend aristocrats” are an elite group of dividend-paying stocks. To become a dividend aristocrat, a company must be an S&P 500 component and must have increased its dividend payout every year for at least 25 years. Unsurprisingly, the dividend aristocrats have been income investor favorites. There are also exchange-traded funds (ETFs) that focus on this elite group of dividend stocks. In this article, we are going to take a look at the best dividend aristocrats ETFs for income investors.
Why Should Income Investors Consider Dividend Aristocrats?
On the surface, it seems that the only thing that separates dividend aristocrats from other dividend-paying stocks in the S&P 500 is their dividend history. But since past performance does not guarantee future results, why should income investors give special consideration to dividend aristocrats?
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Well, the answer lies in the quality and safety of those companies’ dividends. As income investors, the goal is to have a portfolio that can generate a steady stream of income going forward. The thing is, though, just looking at a company’s current dividend yield doesn’t tell investors that much about what’s going to happen in the future. Things may look fine right now, but when the next recession hits, will the company be able to keep making those dividend payments?
If a company is one of the dividend aristocrats, it means it has not only been making uninterrupted dividend payments, but has also been raising them for at least 25 consecutive years. Our economy went through a few ups and downs over the last quarter of a century, including the Great Recession, which many consider to be the biggest downturn since the Great Depression. So by being a dividend aristocrat, the company shows that it has the ability to keep rewarding income investors even when times are tough.
The ability to raise dividends also shows two important qualities of a company. First, because dividends come from the a company’s bottom line, a solid track record of raising its payout implies that the company must have some sort of competitive advantage to keep generating profits. There have been cases where companies are losing money and use debt to fund their dividend payments. However, borrowing can’t go on forever, and most of those companies don’t have a dividend track record impressive enough to make them dividend aristocrats.
Second, it shows that the company is willing to return value to shareholders in the form of dividends. There are many companies with sizable economic moats, but not all of them are willing to pay a dividend. Some may choose to reinvest their earnings, while others may return value to shareholders through stock buybacks. Dividends are sticky; while there is no guarantee, if a company declares a certain amount of dividend, the implication is that it will keep paying at least this dividend rate going forward. This is because in today’s market, few things disappoint investors more than a dividend cut. Therefore, when a company has been raising its dividend for a quarter of a century, it shows, at the very minimum, that this is a company that’s willing to return value to shareholders through dividends.
Why Dividend Aristocrats ETFs?
Now, since dividend aristocrats are so great, why not just invest in these companies?
Well, investing in individual companies in the dividend aristocrats list is certainly a way to go. As a matter of fact, many blue-chip companies on the list are already income investor darlings. Still, there are benefits to using dividend aristocrats ETFs.
Just like any type of ETF, dividend aristocrats ETFs help investors diversify. The current dividend aristocrats list consists of 51 companies. Some of these companies have outperformed the market, while others underperformed. The ETFs that focus on dividend aristocrats typically give investors exposure to companies in a variety of industries. If one company, or even one industry, enters a downturn, it’s likely not going to do too much damage to the performance of the ETF.
Of course, an investor can also diversify their income portfolio by themselves. To achieve diversification across and within segments, it would require picking tens, if not hundreds of companies. Choosing individual companies requires time and effort, not to mention the commission paid to the brokerage every time an order is filled. This bring to the second benefit of using dividend aristocrats ETFs: the saving of the time, effort, and commission of picking stocks yourself.
And then there’s the peace of mind offered by owning dividend ETFs. When an investor builds a portfolio of individual stocks, they might get worried if one company in the portfolio had a bad earnings report. With dividend aristocrats ETFs, the rebalancing is done by investing professionals, so investors might not worry too much about company-specific news.
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In exchange for providing those benefits, ETFs charge a fee. Therefore, when choosing dividend ETFs, it’s important to look at not just its investment goals and components, but also its management expense ratio (MER).
Now, let’s take a look at the five best Dividend Aristocrats ETFs for income investors.
Dividend Aristocrats ETFs List
|ETF Name||Symbol||Dividend Yield||MER|
|ProShares S&P 500 Dividend Aristocrats ETF||NOBL||1.78%||0.35%|
|ProShares S&P MidCap 400 Dividend Aristocrats ETF||REGL||1.11%||0.4%|
|SPDR S&P Dividend ETF||SDY||3.04%||0.35%|
|SPDR S&P Global Dividend ETF||WDIV||3.92%||0.5%|
|Vanguard Dividend Appreciation ETF||VIG||2.02%||0.09%|
1. ProShares S&P 500 Dividend Aristocrats ETF
ProShares S&P 500 Dividend Aristocrats ETF (BATS:NOBL) seeks the investment results of the S&P 500 Dividend Aristocrats Index. It is the only ETF that focuses exclusively on S&P 500 companies that have raised dividends for at least 25 consecutive years. Note that the index has outperformed the S&P 500 with lower volatility since its inception. (Source: “S&P 500 Dividend Aristocrats ETF,” ProShares, last accessed March 23, 2017.)
The S&P 500 Dividend Aristocrats Index is equally weighted, and limits the weight of any single sector to no more than 30% of the index. The index is rebalanced to equal weight each January, April, July, and October, with an annual reconstitution during the January rebalance.
Right now, the NOBL ETF holds 51 companies. Its three largest sectors are consumer staples, industrials, and healthcare. The fund has a management expense ratio of 0.35% and an annual dividend yield of 1.78%.
2. ProShares S&P MidCap 400 Dividend Aristocrats ETF
ProShares S&P MidCap 400 Dividend Aristocrats ETF (BATS:REGL) tracks the performance of the S&P MidCap 400 Dividend Aristocrats Index. It is the only ETF that focuses exclusively on companies in the S&P MidCap 400 Index that have increased their dividends for at least 15 straight years. (Source: “ProShares S&P MidCap 400 Dividend Aristocrats ETF,” ProShares, last accessed March 23, 2017.)
While most blue-chip companies command huge market capitalization, there are mid-cap companies that have solid track records of dividend hikes as well. Moreover, because they are not as established as the large-cap names, some of them could offer more growth potential.
The S&P MidCap 400 Dividend Aristocrats Index is equally weighted, with no single sector contributing to more than 30%. Like the S&P 500 Dividend Aristocrats Index, the mid-cap index is rebalanced four times a year.
The REGL ETF currently holds 44 companies, with the three largest sectors being financials, utilities, and industrials. The ETF has a management expense ratio of 0.4% and an annual dividend yield of 1.11%.
3. SPDR S&P Dividend ETF
SPDR S&P Dividend ETF (NYSEARCA:SDY) seeks to track the performance of the S&P High Yield Dividend Aristocrats Index. The index is designed to measure the performance of companies within the S&P Composite 1500 that have raised dividends every year for at least 20 years. (Source: “SPDR S&P Dividend ETF,” SPDR, last accessed March 23, 2017.)
With an annual yield of 3.04%, SPDR S&P Dividend ETF is a relatively high-paying dividend ETF. The reason is that the index it tracks is weighted by the components’ annual dividend yield. Right now, the ETF holds 110 stocks. Its top three holdings are AT&T Inc. (NYSE:T), AbbVie Inc (NYSE:ABBV), and Realty Income Corp (NYSE:O).
The fund has a management expense ratio of 0.35%.
4. SPDR S&P Global Dividend ETF
SPDR S&P Global Dividend ETF (NYSEARCA:WDIV) seeks to provide the investment return of the S&P Global Dividend Aristocrats Index. The index is designed to measure the performance of the highest-yielding companies within the S&P Global Broad Market Index that have paid increasing or stable dividends for at least 10 straight years.
WDIV is a high-yield dividend ETF, currently yielding 3.92%. This is in part because the index is weighted by indicated annual dividend yield in order to tilt the portfolio towards companies with higher dividend yields. The index also pays attention to dividend sustainability and growth, as it incorporates criteria on dividend payout ratios and maximum dividend yield to exclude companies whose future payouts might not be sustainable.
The fund holds shares of 100 companies, with the largest sectors being financials, utilities, and real estate. The WDIV ETF has an expense ratio of 0.5%.
5. Vanguard Dividend Appreciation ETF
Vanguard Dividend Appreciation ETF (NYSEARCA:VIG) seeks to track the performance of the NASDAQ U.S. Dividend Achievers Select Index. The index consists of a select group of securities with at least 10 consecutive years of dividend hikes. The ETF uses a full replication approach and currently holds 184 stocks. The three largest holdings are Microsoft Corporation (NASDAQ:MSFT), Johnson & Johnson (NYSE:JNJ), and PepsiCo, Inc. (NYSE:PEP). (Source: “Vanguard Dividend Appreciation ETF,” The Vanguard Group Inc, last accessed March 23, 2017.)
VIG ETF has an annual dividend yield of 2.02%. It also has an extremely low expense ratio; at just 0.09%, the ETF’s expense ratio is 91% lower than the average expense ratio of funds with similar holdings.
Final Thoughts on Dividend Aristocrats ETFs
One thing you may have noticed is that dividend aristocrats ETFs are not really the highest-yielding ones in the ETF world. This is because many dividend aristocrats are blue-chip names, and investors are willing to pay a premium for the income safety they provide. Since a company’s dividend yield moves inversely to its price, the popularity of dividend aristocrats means they are not really the highest-yielding stocks on the market.
At the end of the day, keep in mind that the reason of investing in dividend aristocrats is not their yield, but rather the stability, durability, and growth potential of their dividends.