Heading into 2016, expectations were in place for a potentially rough year for dividend stocks and dividend exchange traded funds. Prior to the start of the year, investors heard that S&P 500 dividend growth was expected to slow and it was widely expected that the Federal Reserve would raise interest rates several times, further punishing dividend ETFs.
Thanks in large part to ongoing negative actions from the energy sector, dividend growth is slowing, but the Fed is cooperating by holding off on boosting rates … thus far. Additionally, payout growth is solid, which is providing some support for dividend ETFs.
In fact, according to FactSet, “Aggregate dividend payments totaled $104 billion for Q4 and$415.4 billion over the trailing twelve months. The quarterly amount in Q4 marked the second largest dividend total in at least ten years.”
The research firm adds that shareholder distributions (combined dividends and buybacks) hit $241 billion in the first quarter, one of the best quarters on record, and last year, 70 activist investors pushed companies to boost buybacks or payouts.
More good news comes in the form of data indicating dividend stocks and dividend ETFs are outpacing their non-payout counterparts this year. However, as seasoned income investors well know, instruments such as dividend ETFs are more potent over longer holding periods.
With that in mind, here are three dividend ETFs that really can be held for forever.
Dividend ETFs You Can Hold Forever: WisdomTree MidCap Dividend Fund (DON)
Dividend Yield: 2.68%
Expense Ratio: 0.38%, or $38 for every $10,000 invested
Mid-cap stocks are often thought of as growth vehicles, but investors can find quality, value and dividend growth in this universe. The WisdomTree MidCap Dividend Fund (DON) is a dividend ETF that you can use to play the oft-overlooked theme of mid-cap dividends.
One of the primary reasons investors embrace dividend ETFs is that, much like a dividend stock, a dividend has the potential to deliver superior long-term returns relative to a non-dividend equivalent. DON is doing just that.
Over the last three years, this dividend ETF is up just over 54%, including dividends, while the S&P MidCap 400 is higher by about 24% during the same period.
Home to nearly 400 holdings, DON does not allocate more than 2.5% of its weight to any of its constituents. This dividend ETF allocates 22.6% of its weight to financial services names with the consumer discretionary, utilities and industrial sectors combining for over half of DON’s sector lineup.
The exposure to financials and discretionary names is important because those sectors have delivered impressive dividend growth since the financial crisis.
DON’s distribution yield of 2.68% is more than 100 basis points above what investors will find on 10-year Treasurys.
Dividend ETFs You Can Hold Forever: Vanguard High Dividend Yield ETF (VYM)
Dividend Yield: 3.24%
Expense Ratio: 0.09%
Vanguard, the second-largest U.S. ETF issuer, is once again on a torrid asset-gathering pace. This year, the Pennsylvania-based company averages a staggering $1 billion per day of inflows.
The Vanguard High Dividend Yield ETF (VYM) is part of that growth with year-to-date inflows of over $1.5 billion.
Vanguard index funds and ETFs are often favored by advisors and investors due to low fees and VYM is a dividend ETF that does not disappoint on that front. VYM charges just 0.09% per year, or $9 for every $10,000 invested. That makes it less expensive than 92% of rival funds and puts this dividend ETF at the lower of end of annual fees levied in the dividend ETF space.
Obviously, the lower a dividend ETF’s expenses are, the easier it is to hold it for the long haul because lower fees mean less erosion of returns.
Although VYM says “high dividend” in its name, this dividend ETF is not ultra-rate sensitive because high-yielding telecom and utilities names combine for less than 14% of the ETF’s weight. That is less than VYM’s consumer staples weight and barely more than its financial services allocation.
This dividend ETF is not weighted by length of dividend increase streak as some dividend ETFs are, but it is chock full of stocks with long and recently started payout increase streaks.
For example, VYM’s top 10 holdings include Microsoft Corporation (MSFT) as well as Johnson & Johnson (JNJ) and Procter & Gamble Co (PG), two of the stocks with longest dividend increase streaks in the S&P 500.
Dividend ETFs You Can Hold Forever: SPDR S&P 500 Dividend ETF (SDY)
Dividend Yield: 2.42%
Expense Ratio: 0.35%
Like the aforementioned VYM, the SPDR S&P 500 Dividend ETF (SDY) is one of the old standbys among dividend ETFs.
One reason why investors have made SDY a Goliath among dividend ETFs, plunking nearly $13 billion into this fund, is that SDY is one of the dividend ETFs that follows a dividend aristocrats index.
SDY tracks the S&P High Yield Dividend Aristocrats Index, which only holds high dividend stocks that have boosted payouts for at least 20 consecutive years. Due to the recent spate of negative dividend actions from the energy patch, that sector is lightly represented in SDY at a weight of just 3.2%. However, SDY’s largest sector weight is 24.2% allocated to financial services.
That may surprise some dividend investors that remember rampant payout cuts from big banks during the financial crisis, but the bulk of SDY’s holdings from that sector are smaller banks and real estate investment trusts.
One drawback with SDY is that because of its 20-year dividend increase requirement, this dividend ETF is lightly allocated to the technology sector with a weight of just 3.8%.
As of this writing, Todd Shriber was long JNJ.