An easy way of gaining exposure is via an exchange-traded fund, or ETF, that selects a basket of high-yielding equities by tracking an external index, using a proprietary quantitative screening methodology, or via the fund manager’s discretion. These ETFs are referred to as high-yield dividend ETFs.
“A high-yield dividend ETF generally invests in dividend-paying stocks with the primary objective of providing a higher yield than that of the broader stock market,” says Michael Collins, professor at Endicott College Gerrish School of Business. For reference, the benchmark SPDR S&P 500 ETF (ticker: SPY) currently pays a trailing-12-month yield, or TTM, of 1.6%.
By bundling different high-yield dividend stocks together, these ETFs can offer investors a consistent stream of income on a monthly or quarterly basis in exchange for a fee, called an expense ratio. “The primary benefit of high-yield dividend ETFs is exposure to a diversified portfolio of income-generating assets without having to actively manage your own investments,” Collins says.
Christopher Conway, senior portfolio manager at GYL Financial Synergies, agrees, noting: “When looking at the specific holdings of a high-yield dividend ETF, it is not uncommon to see stocks with challenged business models or industries, and the high dividend yield is really just the byproduct of a stock price that has declined due to these risks.”
Therefore, its important for investors to conduct ample due diligence before investing in a high-yield dividend ETF. “Important considerations include the expense ratio, underlying index tracked, portfolio turnover and metrics such as dividend yields, payout and valuation ratios,” Collins says.
Here’s a look at seven of the best high-yield dividend ETFs on the market right now:
|Vanguard High Yield Dividend ETF (VYM)||3.1%|
|iShares Core High Dividend ETF (HDV)||3.9%|
|Schwab U.S. Dividend Equity ETF (SCHD)||3.6%|
|Franklin U.S. Low Volatility High Dividend Index ETF (LVHD)||3.3%|
|Invesco S&P 500 High Dividend Low Volatility ETF (SPHD)||4.1%|
|SPDR Portfolio S&P 500 High Dividend ETF (SPYD)||4.5%|
|Vanguard International High Dividend Yield ETF (VYMI)||4.5%|
Vanguard High Yield Dividend ETF (VYM)
“One metric that every investor in a high-yield dividend ETF needs to pay attention to is the expense ratio,” says Derek Horstmeyer, professor of finance at George Mason University School of Business. “We know that this is one of the main determining factors of long-run returns.” For a straightforward and affordable high-yield Vanguard dividend ETF that features low fees, look no further than VYM.
Like many of Vanguard’s ETFs, VYM is passively managed, tracking the FTSE High Dividend Yield Index. By doing so, the ETF provides broad exposure to 440 U.S. large-cap dividend stocks screened for high yields. Coincidently, VYM’s dividend screener also ensures decent exposure to large-cap value stocks. The ETF charges a 0.04% expense ratio.
iShares Core High Dividend ETF (HDV)
Investors should look to ETFs that track diversified indexes and have a history of strong performance. A possible pick here is HDV, which tracks 75 U.S. dividend stocks selected by the Morningstar Dividend Yield Focus Index.
In addition to screening holdings for attractive dividend yields over the last 12 months, HDV’s index also screens for strong financial quality by assessing the sustainability of a company’s competitive advantage, operating and financial leverage, sales sensitivity, pricing power and share price volatility. HDV charges a reasonable 0.08% expense ratio.
Schwab U.S. Dividend Equity ETF (SCHD)
“For some of our accounts, we use SCHD because the ETF invests in stocks that have relatively attractive dividend yields but also high return on equity, a track record of dividend growth, limited levels of debt, and higher-quality business models with reasonable valuation multiples,” Conway says. “In addition, the ETF is diverse and has a relatively low expense and turnover ratio.”
SCHD achieves this by tracking the Dow Jones U.S. Dividend 100 Index, which as its name suggests holds 100 U.S. dividend stocks with a large-cap value focus. Holdings in SCHD are screened for both quality and sustainability of dividends, and financial strength relative to sector peers. Other perks of SCHD include a low expense ratio of 0.06% and a low portfolio turnover rate of 14.1%.
Franklin U.S. Low Volatility High Dividend Index ETF (LVHD)
“Dividend ETFs may help investors with risk management during times of heightened market instability or protracted downturns,” says Michael LaBella, senior vice president and head of sustainable portfolio solutions at Franklin Templeton. “For instance, an ETF like LVHD can benefit investors who want income but are concerned about the volatility associated with traditional equity income investments.”
LVHD targets the unique QS Low Volatility High Dividend Index, which screens the 3,000 largest stocks in the Solactive U.S. Broad Market Index for high yields, low volatility and sustainable earnings. The index reduces concentration risk by capping individual stocks at 2.5%, sectors at 25%, and real estate investment trusts, or REITs, at 15%. LVHD charges a 0.27% expense ratio.
Invesco S&P 500 High Dividend Low Volatility ETF (SPHD)
“If an investor’s objective is to generate income, I would look at the ETF’s distribution yield and ensure that that is at a high level, while also looking at volatility and making sure that it is not too high,” says Henry Green, investment strategist at KraneShares.”However, the risk here is underperforming in a market cycle that favors growth stocks as high-yield dividend stocks tend to have a value bias.”
An ETF that makes this trade-off is SPHD, which selects 50 stocks from the S&P 500 index with both high yields and low volatility metrics. The largest sectors in this fund currently include real estate, utilities and consumer staples at approximately 18%, 17% and 13%, respectively. Currently, SPHD charges an expense ratio of 0.3%.
SPDR Portfolio S&P 500 High Dividend ETF (SPYD)
Investors targeting just the highest-yielding dividend stocks in the S&P 500 can opt for SPYD, which tracks the S&P 500 High Dividend Index. With just 80 holdings, this ETF significantly underweights many of the usual top sectors in the regular S&P 500 index, such as information technology, health care and communication services, while overweighting others.
Specifically, SPYD holds much higher allocations to dividend-paying sectors like real estate, financials, utilities, materials and consumer staples, at 21%, 17%, 14%, 8% and 8%, respectively. This gives the ETF a very different risk-return profile than the regular S&P 500 index. Currently, SPYD charges a low 0.07% expense ratio.
Vanguard International High Dividend Yield ETF (VYMI)
For maximum diversification, dividend investors can also target high-yield stocks from outside the U.S. market. Foreign countries like the U.K., Canada, Japan, Australia, Switzerland, Germany, France and China can provide exposure to international dividends. If the U.S market ever falters, these countries can potentially pick up the slack. For a diversified pick, VYMI could work.
VYMI currently holds just over 1,300 international dividend stocks from both developed and emerging markets by tracking the FTSE All-World ex US High Dividend Yield Index. With a TTM yield of 4.5%, this ETF currently pays a stronger dividend than its domestic counterpart, VYM. However, the cost of indexing international stocks is higher, giving VYMI a greater expense ratio of 0.22%.