Dividend exchange-traded funds are a great way for investors to get their income fix. After all, ETFs allow you to hold a bundle of stocks, so you’re piling diversification on top of holding big, stable blue chips.
While there are varying flavors of dividend ETFs — from international dividend payers to those that focus on growing their income streams — one of the best groups is a set of smart-beta products that trend toward so-called “quality” dividends.
The problem with many dividend ETFs — like the $13 billion iShares Select Dividend ETF (DVY) — is that their underlying indices are often based on just one attribute. A fund might focus on high yield, or being a member of a particular dividend club. The problem is, by really honing in on one metric to design a portfolio, ETFs can let in some real undesirables.
For example, rural telecommunications company Frontier Communications (FTR) and its juicy 6.1% yield often makes its way into dividend ETFs that promise a high payout. The problem is that FTR has been struggling with its cash flows as consumers decide to eschew having a land-line phone. The firm has cut its dividend before, but because it is a “high-yielding” stock, it’s a holding in many dividend ETFs.
Smart-beta dividend ETFs and fund hope to circumvent these issues by betting on a total package of positive dividend attributes. They take bread ‘n’ butter indices such as the S&P 500 and apply various screens — for profitability, cash flow, dividend growth, payment histories and more — to create portfolios. That’s where the concept of “quality” dividends take hold.
And there is plenty of academic evidence that suggests that quality earnings and dividends — not merely high yields — consistently delivers better risk-adjusted returns than the overall market, especially over the longer haul.
That said, here are three of the best quality dividends ETFs for investors to consider: