It’s true what Albert Einstein said, “The most powerful force in the universe is compound interest.” When it comes to investing, that compounding comes from a hefty dose of reinvesting a firm’s dividends into additional shares of a firm’s stock. Those shares then pay out higher dividends and the cycle repeats.
It’s one of the sure-fire ways to get consistent market-beating long-term returns.
However, building a broad portfolio of dividend stocks does take a lot of time and can be a difficult and daunting task. This is why plenty of investors have plowed head-first into many of the numerous dividend exchange-traded funds on the market.
Data provider ETFdb.com pegs the number of dividend ETFs currently at 122. But even then, the vast bulk of investors’ money — around $45 billion — is tied to just three dividend ETFs.
There’s nothing inherently wrong with the Vanguard Dividend Appreciation ETF (VIG), iShares Select Dividend ETF (DVY) or SPDR S&P Dividend (ETF) (SDY). All offer broad exposure to dividend stocks and feature low fees. Nevertheless, investors may be better suited in one of the more “funkier” and less-popular choices depending on what they are actually looking for.
Here are three more out-of-the-box dividend ETFs you should consider moving into.
Funky Dividend ETFs: WisdomTree Dividend ex-Financials Fund (DTN)
Dividend Yield: 4%
Expenses: 0.38%, or $38 annually on every $10,000 invested
Worried that the downturn in oil prices is going to set forth a wave of defaults by energy companies and significantly harm bank stocks? Don’t laugh. Some analysts certainly think so, and we have already seen a ton of smaller and mid-size firms go under.
Furthermore, since financial stocks are some of the biggest holdings in a lot of dividend ETFs, those funds could see some pretty weighty losses if prices for crude stay down.
That’s where the WisdomTree Dividend ex-Financials Fund (DTN) comes in.
The $860 million DTN tracks an index of high-yielding, domestic large-cap dividend stocks and simply kicks out any banks, insurance companies and other financials. What’s left in this dividend ETF is a portfolio of 85 different powerhouse payers. The highest sector concentrations include utilities, consumer stocks and energy firms. And don’t let the energy part scare you — DTN doesn’t hold many producers. Instead, the bulk of that weighting belongs to firms that move energy around, such as Spectra Energy Corp. (SE), or firms that benefit from lower prices, such as refiner Valero Energy Corporation (VLO).
As for the protection of not having financial firms, DTN hasn’t had a real test yet. This fund had a different investment objective altogether until 2009, when it switched to dividend stocks ex-financials, so in its current form, it did not “go through” the 2008-09 financial crisis in its entirety. However, over the past six months and the start of this current bear market, DTN has managed to outperform the broader S&P 500.
Funky Dividend ETFs: ALPS Sector Dividend Dogs ETF (SDOG)
Dividend Yield: 4.1%
Despite being one of the largest distributors of mutual funds, ALPS’ ETF lineup doesn’t really get that much respect from investors. That’s a shame because it has one of the best dividend ETFs around.
The ALPS Sector Dividend Dogs ETF (SDOG) tracks the S-Network Sector Dividend Dogs Index, which is made up of the five highest-yielding securities in each sector of the S&P 500. The stocks are then equally weighted and rebalanced quarterly. Aside from providing a high yield — currently just north of 4% — this plays into the “Dogs of the Dow”-style theory.
Stocks have high yields for two reasons: 1) Firms are very generous or 2) share prices have been beaten down enough to give it a high yield. Any “dogs” strategy involves buying whatever stocks underperformed in the past year. The idea is that last year’s losers can become the next year’s winners as investors try to take advantage of more attractive valuations and higher dividend yields as a result of their losses.
On that front, SDOG has been pretty successful. It has managed to outperform both the S&P 500 and the previously mentioned DVY on a total return basis since its inception in 2012.
Funky Dividend ETFs: FlexShares Quality Dividend Index Fund (QDF)
Dividend Yield: 3.1%
The concept of “quality” may seem like an abstract idea when it comes to investing. We’d all like to own “quality” stocks and not “garbage.” But how do you define quality? Asset manager Northern Trust Corporation (NTRS) has the skinny on the concept.
The $1 billion FlexShares Quality Dividend ETF (QDF) uses screens to weed out “minor-league” dividend stocks from its parent index, the Northern Trust 1250 Index. Stocks selected for this dividend ETF are selected based on expected dividend payments and various fundamental factors such as profitability, top-notch management scores and reliable cash flows. These screens whittle QDF’s portfolio down to a basket of dividend stocks (currently 184) that represent the cream of the dividend crop. Top holdings include Home Depot Inc (HD), 3M Co (MMM) and Apple Inc. (AAPL).
Buying quality certainly does make a difference over time. Since the fund’s inception in 2012 to the end of last year, it has managed to put up an average annual return of 14.5%. That’s not too shabby. Even more impressive is that this dividend ETF beat the previously mentioned DVY by roughly a full percentage point in that time.
*Includes 1-basis-point fee waiver through March 1, 2016
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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