Dividend ETFs have become increasingly popular with investors as they flee underperforming bonds. Many investors have already made the switch into dividend funds or are considering doing so because they produce a decent amount of income along with capital appreciation potential.
But which dividend ETFs should you choose?
Like any investment decision, it’s important to consider why you’re investing in these funds and what you hope to accomplish by doing so. For me, I’m always looking to simplify my investments — I want to own as few as possible.
When it comes to dividend ETFs and putting together a portfolio for the long haul, I’ve got four recommendations that you can own either as a complete portfolio or within a larger group of stocks or ETFs.
Large-Cap Domestic Dividend ETF: Schwab U.S. Dividend Equity ETF (SCHD)
Although there are many considerations that go into evaluating the true costs of owning dividend ETFs, the management expense ratio is likely the most prominent.
When it comes to large-cap stocks, I like to see really low MERs. After all, liquidity isn’t a problem with any of the holdings so why should costs be an issue? Schwab’s U.S. Dividend Equity ETF (SCHD) charges an annual management fee of 0.07% — three basis points less than the next-most thrifty dividend ETF.
SCHD replicates the performance of the Dow Jones U.S. Dividend 100 Index, which is relatively new index first calculated Aug. 31, 2011. Using four fundamentals (cash flow to total debt, return on equity, dividend yield and five-year dividend growth rate) the index then screens for dividend payment consistency, size and liquidity.
What comes out the other side is a group of 100 large-cap dividend-paying stocks where the top 10 holdings accounting for 42% of its $1.4 billion in total net assets. Lest we forget why we’re here, the 30-day SEC yield is 2.67%.
Large-Cap International Dividend ETFs: SPDR International Dividend ETF (DWX)
When diversifying beyond the U.S., especially if it’s your first time wading into the global pool, it’s wise to go with bigger, more established companies that will be sure to continue paying dividends.
To keep things simple, I’ll want to cover as much ground with one of these dividend ETFs as I possibly can. As a result, the expense ratio becomes less of an issue. Paying an extra 10 or 20 basis points if it gets you the entire world seems like a fair exchange.
The SPDR International Dividend ETF (DWX) has been in existence for almost six years. In that time, it has produced a five-year annualized total return of 15.03% through Dec. 4 — 124 basis points greater than its MSCI EAFE benchmark. With a 30-day SEC yield of 6.4%, it’s getting almost half its performance from dividends.
The weighted average market cap of its 95 holdings is $10 billion, far less than the $35 billion for its benchmark. If you absolutely must own large-caps only, this might not be for you. However, I view mid caps as the sweet spot when it comes to investing for the long-haul. And with an expense ratio of 0.45%, I think investors are getting a very good deal.
Midcap Dividend ETFs: Wisdom Tree MidCap Dividend Fund (DON)
My previous selection makes my third ETF a much easier choice. With a natural affinity for mid-cap stocks, I’m torn between the Wisdom Tree MidCap Dividend Fund (DON) and the WisdomTree International MidCap Dividend Fund (DIM).
However, since I’ve got a little international mid-cap exposure with the dividend ETFs above, I’ll go with DON, which invests in 364 U.S. dividend-paying stocks with market caps between $2 billion and $10 billion.
WisdomTree’s website states: “The Index is comprised of the companies that compose the top 75% of the market capitalization of the Wisdom Tree Dividend Index after the 300 largest companies have been removed.” So, out of 1300 companies, 364 make it into the ETF.
The No. 1 holding of DON is Best Buy (BBY), a stock I’ve liked for some time. With a 30-day yield of 2.48% and an annual expense ratio of 0.38%, you’re definitely getting quality at a reasonable price. Finally, not that this had any bearing on my selection, but Morningstar gives DON a four-star rating for above-average returns, combined with average risk.
Small-Cap Dividend ETFs: WisdomTree International SmallCap Dividend Fund (DLS)
Going outside the U.S. once more, I finish my recommendations with the WisdomTree International SmallCap Dividend Fund (DLS), an ETF with 874 small-cap holdings totaling $1.3 trillion in market cap or an average of $1.5 billion per holding.
Japan, the United Kingdom and Australia account for 56% of the portfolio’s $753 million in total net assets. More than seven years old, the fund currently generates a 30-day SEC yield of 2.95% and has a five-year annualized total return of 19.8%. It also garners four stars from Morningstar, and, not surprisingly, it has the highest expense ratio at 0.58%.
Put an equal amount into all four dividend ETFs and you get the following:
- A portfolio split equally amongst U.S. and foreign stocks
- 35% invested in large caps, 49% in midcaps, and 16% in small caps
- 52% value, 17% growth and 31% blend
- An average market cap of $8.5 billion
- A yield of 3.87%
- An overall expense ratio of 0.37%
- A year-to-date return of 20.4%
Most importantly, you get a dividend ETF portfolio built for the long haul.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.