In seeking ETFs with a dividend focus, eliminating portfolios with expense ratios above .20% and those that have poor transparency, knocks out the four largest such funds.
The big four are Vanguard Dividend Appreciation (VIG, expense ratio 0.08%), Vanguard High Dividend Yield (VYM, 0.08%), iShares Select Dividend (DVY, 0.39%), and SPDR S&P Dividend (SDY, 0.35%). Together, these four ETFs have more than $80 billion in assets under management.
DVY and SDY don’t make the cut on the cost screen.
VIG and VYM clearly excel on cost. They are two of the eight dividend-focused ETFs with expense ratios under 0.20%. But they fall down on transparency. These ETFs are classes of traditional Vanguard mutual funds and disclose holdings 15 days after the end of the calendar month, rather than daily.
Advisors looking to add a diversified package of dividend-paying stocks to client portfolios have other choices. The website ETF.com lists 148 exchange traded funds with a dividend focus available to investors in the U.S. But screening for cost, transparency and size restricts the universe.
Looking at the eight with the lowest expense ratios, two are the Vanguard portfolios already mentioned and three others hold assets of less than $1 billion. Although that’s not an automatic danger sign, ETFs that don’t attract enough assets are in danger of closing. And a shuttered ETF can mean a taxable event for your clients.
Of the remaining low cost dividend ETFs, the two with the best performance records are Schwab U.S. Dividend Equity (SCHD, 0.07%) and iShares Core Dividend Growth (DGRO, 0.08%). Here’s a closer look at each:
Schwab U.S. Dividend Equity ETF was launched in October 2011 and holds 103 positions. As of June 8, SCHD’s one-year total return was 14.59%. The fund is based on the Dow Jones U.S. Dividend 100 Index, which includes companies that have paid dividends for at least 10 years and have a minimum market cap of $500 million. Potential index components are screened on four factors: cash flow to total debt, return on equity, dividend yield and five-year dividend growth. Issues are ranked by yield, with preferred stocks, REITs, and MLPs excluded. The ETF uses a modified market cap weighting system and has additional restrictions that put limits on individual stock and sector dominance. Recently, Exxon Mobil (XOM) was the portfolio’s largest single holding at 5% of assets. Largest sector weightings are information technology (20.9%) and consumer staples (20.8%). The fund has $7.4 billion in assets and the recent SEC yield was 3.06%.
iShares Core Dividend Growth ETF holds more than 450 equity positions. As of June 8, DGRO’s one-year total return was 15.01%. The ETF was first offered to the public in June 2014 and is based on the Morningstar U.S. Dividend Growth Index. That index requires constituents to have at least five years of dividend growth, an indicated dividend yield below the top 10% of the universe, a positive earnings consensus and a payout ratio of less than 75%. Dividends must be qualified. Individual stocks are capped at a 3% weighting, though they can rise above that before periodic rebalancing. DGRO’s recent top holding was Apple (AAPL) at 3.24% of assets. Top sector weightings are financials (18.66%) and health care (16.90%), with IT close behind at 16.89%. The fund has $3.7 billion in assets and the recent SEC yield was 2.24%.
Each of these ETFs provides commendable performance, low cost and good transparency in a diversified dividend-focused fund. Either would be a worthwhile addition to client portfolios.