Dividend ETFs Vs. Individual Stocks
For the past several years, things haven’t been going that great for income investors. Fixed-income products didn’t pay much, while high-yield dividend stocks could be risky. But, rather than trying to pick the right individual stocks, many investors have used dividend exchange-traded funds (dividend ETFs ) to build their income portfolios. Why invest in dividend ETFs instead of individual stocks? Let’s take a look.
For those not in the know, a dividend ETF consists of dividend-paying stocks and usually tracks an index. In the United States, there are around 150 ETFs that can be classified as dividend ETFs.
One obvious benefit of investing in dividend ETFs instead of individual stocks is the saving of time and effort. While there is plenty of information online that teaches investors how to build a dividend portfolio that suits their needs, not every investor has the time to do it. Security analysis takes a long time to master. For some investors, buying dividend ETFs could be a much faster way to get started on dividend investing.
ETFs also help with diversifying. As an income investor, you probably already know that putting all your eggs in one basket is a bad idea. Income investors are not betting on “the next big thing.” Rather, the goal is to build a portfolio that can provide reliable dividends for decades to come.
That’s why diversifying is so important. For instance, many stocks in the oil and gas industry were paying impressive dividends because of their huge profit during the commodity price boom. But, once that industry entered a downturn, some of those companies had to cut their payouts. If an investor’s portfolio consisted entirely of stocks in this industry, their income stream could be severely impacted.
The good thing is that many dividend ETFs diversify across different sectors. They contain tens, and sometimes more than a hundred companies operating in all kinds of industries. The hiccup at one particular company or a downturn in one particular sector could have a limited impact on the income stream provided by a dividend ETF.
On top of all that, dividend ETFs could also be less worrying than individual stocks. The idea is that dividend ETFs are already diversified, and what each fund consists of has already been determined. If a company just had a bad earnings report, an investor of that individual stock might worry whether this is a one-time event or if the company’s fundamentals have changed. They may have to decide what to do with their position. If an investor owns this company through diversified dividend ETFs, however, they might not worry too much about company-specific news like this.
But, of course, there is no perfect thing in the world of investing. While dividend ETFs can be great investments, they do come at a cost. As is the case with any fund, dividend ETFs charge a fee. But, because they are passively managed, the management expense ratio (MER) could be as low as 0.1%.
A more substantial cost of putting your money in dividend ETFs is that you don’t get much control. Each individual is different; you may have a very different set of investment objectives and risk tolerance compared to the next investor. A dividend ETF can provide great yields, but it’s unlikely to be tailored to your own investment goals and risk profile.
So, should you invest in dividend ETFs or stocks? Well, if you have time, doing your own research on individual stocks to build an income portfolio that suits your needs could be rewarding. But, if you don’t, dividend ETFs could offer you a great way to quickly get started on income investing.
With that in mind, let’s take a look at five of the top dividend ETFs.
Top Dividend ETFs
1. Powershares S&P 500 High Dividend Low Volatility Portfolio
Powershares S&P 500 High Dividend Low Volatility Portfolio (NYSEARCA:SPHD) seeks investment results that generally correspond to the price and yield of the S&P 500 Low Volatility High Dividend Index. At least 90% of the fund’s total assets are invested in stocks that comprise the index. SPHD’s portfolio heavily overweights traditionally defensive industries. The three largest sectors in SPHD’s portfolio are utilities (17.83%), industrials (14.88%), and real estate (12.72%). (Source: “SPHD – PowerShares S&P 500 High Dividend Low Volatility Portfolio,” Invesco Distributors, Inc., last accessed January 5, 2017.)
Right now, SPHD has a dividend yield of 3.76%. The fund has an expense ratio of 0.30%.
2. ProShares S&P 500 Dividend Aristocrats ETF
ProShares S&P 500 Dividend Aristocrats ETF (BATS:NOBL) tracks the S&P 500 Dividend Aristocrats Index, which targets S&P 500 companies that have increased dividend payments each year for at least 25 years. The ETF’s most heavily weighted sectors are consumer staples (25.99%), industrials (16.77%), and health care (14.09%). (Source: “S&P 500 Dividend Aristocrats ETF,” ProShares, last accessed January 5, 2017.)
NOBL has an annual dividend yield of 2.11%. Its expense ratio is 0.35%.
3. iShares International Select Dividend ETF
iShares International Select Dividend ETF (NYSEARCA:IDV) seeks to track the investment results of an index composed of relatively high dividend-paying stocks in non-U.S. developed markets. This ETF gives investors exposure to established, high-quality international companies that pay dividends. Its top three holdings are Royal Dutch Shell Plc (AMS:RDSA) (3.65%), Commonwealth Bank of Australia (ASX:CBA) (3.41%), and AstraZeneca plc (ADR) (NYSE:AZN) (3.27%). (Source: “iShares International Select Dividend ETF,” iShares, last accessed January 5, 2017.)
IDV has an annual dividend yield of 4.62%. Its expense ratio is 0.50%.
4. iShares U.S. Preferred Stock ETF
iShares U.S. Preferred Stock ETF (NYSEARCA:PFF) tracks an index of preferred stocks traded on the NYSE and NASDAQ. Preferred shares give investors an opportunity to collect above-average yield with relatively low risk. To limit concentration risk, this ETF caps any single issuer’s weight at 10%. (Source: “iShares U.S. Preferred Stock ETF,” iShares, last accessed January 5, 2017.)
PFF has an expense ratio of 0.47% and an annual dividend yield of 6.06%.
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. This ETF selects firms that have increased their annual dividends for 10 or more consecutive years and market-cap weights its holdings. By the end of November 2016, the fund held 186 stocks, with the largest being Microsoft Corporation (NASDAQ:MSFT) (4.3%), Johnson & Johnson (NYSE:JNJ) (3.9%), and PepsiCo, Inc. (NYSE:PEP) (3.6%). (Source: “Vanguard Dividend Appreciation ETF,” The Vanguard Group Inc, last accessed January 5, 2017.)
VIG has an expense ratio of just 0.09%, which is 91% lower than the average expense ratio of funds with similar holdings. The ETF has an annual dividend yield of 2.13%.