Rising interest rates can be a bane for dividend stocks and high-yielding, income-oriented sectors, but there is some positive news in the 2018 dividend outlook. Through the first half of the year, approximately 40% of S&P 500 member firms boosted dividends, potentially making some of the best funds to buy in the dividend landscape all the more attractive.
More than 80% of the S&P 500 pays dividends, but as of July 27, the benchmark U.S. equity index yields just 1.9%. That is nearly 110 basis points below the current yield on 10-year Treasuries. Looked at differently, some of the best funds to buy need to show investors that dividend stocks are worth the extra risk relative to safer U.S. government debt.
Importantly, this year’s dividend growth has been well-diversified at the sector level, meaning income investors seeking the best funds to buy do not need to rely on high-yield, rate-sensitive sectors to boost their income profiles.
For income-minded investors, here are some of the best funds to buy in the current market environment.
Best Funds to Buy: WisdomTree U.S. SmallCap Dividend Fund (DES)
Expense Ratio: 0.38% per year, or $38 on a $10,000 investment.
12-Month Dividend Yield: 2.7%
For conservative investors looking for income and small-cap exposure, the WisdomTree U.S. SmallCap Dividend Fund (NYSEARCA:DES) is one of the best funds to buy. DES stands out in the current market environment because, amid the rising dollar and trade war talk, small-cap stocks and ETFs are outperforming their large-cap counterparts.
Small-cap stocks typically generate significantly larger portions of their revenue domestically than do large-caps, a trait keeping DES steady as investors become increasingly jittery about the U.S./China trade war. The top three sector weights in DES — consumer discretionary, industrials and real estate — rely on the U.S. for major chunks of revenue.
While DES is trailing non-dividend small-cap ETFs this year, this one of the best funds to buy because it is less volatile than traditional small-cap benchmarks while offering a monthly dividend and a higher dividend yield.
Best Funds to Buy: SPDR Blackstone/GSO Senior Loan ETF (SRLN)
Expense Ratio: 0.7%
12-Month Dividend Yield: 4.2%
The SPDR Blackstone/GSO Senior Loan ETF (NYSEARCA:SLRN) is one of the best funds to buy now because senior loans can help fixed-income portfolios endure rising interest rates while not cheating investors of much-needed income.
“Leveraged loans, also referred to as senior loans as they are senior in the capital structure to traditional bonds, are growing in popularity as investors seek yield while keeping an eye on duration as interest rates rise,” said State Street Global Advisors in a recent note. “Given their seniority, there is also element of not stretching for yield, a notion supported by positive loan ETF flows in 2018 compared to a dearth of outflows in traditional high yield.”
Actively managed, SRLN holds about 320 senior loans, of which over 72% are rated between BB- and B, so there is some element of credit risk with senior loan funds. SRLN also compensates investors for that risk in the form of a 30-day SEC yield of 4.6%.
Best Funds to Buy: Vanguard International Dividend Appreciation ETF (VIGI)
Expense Ratio: 0.25%
12-month Dividend Yield: 1.8%
Some of the best funds for dividend and income portfolios are international ETFs. Enter the Vanguard International Dividend Appreciation ETF (NASDAQ:VIGI), which mixes developed and emerging markets equities. VIGI tracks the NASDAQ International Dividend Achievers Select Index, which only includes companies with minimum dividend increase streaks of seven years.
“This low-cost fund prioritizes dividend growth over yield, which emphasizes highly profitable firms that should hold up better than most during market downturns and offer attractive long-term returns,” said Morningstar in a recent research note.
This fund holds over 310 stocks, of which 26% are emerging-markets names. VIGI trades at a discount to the S&P 500 and is outperforming major developed and emerging markets equity benchmarks this year.
Best Funds to Buy: FlexShares High Yield Value-Scored Bond Index Fund (HYGV)
Expense Ratio: 0.37%
12-Month Dividend Yield: Fund less than one year old
The FlexShares High Yield Value-Scored Bond Index Fund (NYSEARCA:HYGV) is the newest ETF on this list, having debuted in mid-July, but that rookie status does not diminish HYGV’s best funds to buy status. HYGV has an effective duration of just over four years, making this new ETF an intermediate-term corporate bond fund.
At a time when many investors are apprehensive about corporate bonds in the face of higher interest rates, HYGV has the potential to emerge as one of the best funds to buy in this asset class due to its unique methodology.
While traditional corporate bond funds are weighted by market value (issuer size), HYGV emphasizes value and liquidity, which could make for a better high-yield mousetrap. The ETF’s underlying index eliminates the bottom 10% of issuers according to its scoring methodology, but HYGV does allocate over 17% of its weight to highly speculative CCC-rated debt.
Best Funds to Buy: Oppenheimer Ultra Dividend Revenue ETF (RDIV)
Expense Ratio: 0.39%
12-Month Dividend Yield: 5%
One of this year’s best-performing dividend ETFs overall is the Oppenheimer Ultra Dividend Revenue ETF (NYSEARCA:RDIV). It’s up about 5.6% year-to-date, putting it well ahead of some of the most-heralded dividend ETFs.
Like some of the other funds highlighted here, what makes RDIV one of the best funds to buy for income investors is its unique weighting scheme. RDIV’s roster is comprised of the S&P 900 Index member firms with the highest trailing dividend yields. RDIV then weights those companies by revenue, not market value, a strategy that can reduce volatility and keep investors away from richly valued stocks.
RDIV’s status as one of the best funds to buy this year is all the more impressive when considering it is heavily allocated to several high-yield, rate-sensitive sectors. The utilities, telecommunications and real estate sectors combine for over 41% of RDIV’s roster.
Best Funds to Buy: WisdomTree U.S. Quality Dividend Growth Fund (DGRW)
Expense Ratio: 0.28%
12-Month Dividend Yield: 1.9%
The WisdomTree U.S. Quality Dividend Growth Fund (NASDAQ:DGRW) is one of the best funds to buy because of its emphasis on the quality factor, an oft-overlooked investment factor relative to growth and value. Quality is especially useful in the dividend landscape, where being able to identify financially sturdy companies with management teams committed to paying and growing dividends is paramount.
Another point in DGRW’s favor is its status as a dividend growth, not yield, play. This WisdomTree offering features no telecommunications exposure and only scant allocations to the utilities and real estate sectors.
DGRW devotes almost 22% of its weight to the technology sector, one of the largest allocations to that sector among all domestic dividend strategies. That is very likely one reason why DGRW is beating the Dow Jones U.S. Select Dividend Index by over 200 basis points over the past three years.
Best Funds to Buy: Schwab US Dividend Equity ETF (SCHD)
Expense Ratio: 0.07%
12-Month Dividend Yield: 2.8%
For frugal investors, the Schwab US Dividend Equity ETF (NYSEARCA:SCHD) is one of the best funds to buy because with an expense ratio of just 0.07%, it is also one of the cheapest dividend ETFs to buy. Additional cost savings can be realized by Schwab clients because the brokerage firm does not charge commissions on its ETFs.
SCHD holds just over 100 stocks and tracks the Dow Jones U.S. Dividend 100 Index, which requires member firms to dividend increase streaks spanning at least a decade, explaining the fund’s light-by-comparison financial services exposure. Consumer staples and tech stocks combine for 43% of this fund’s weight.
Another reason SCHD is a best fund to buy is its value tilt. Value stocks have been lagging for a while and those considering SCHD now could buy it ahead of a legitimate resurgence for large-cap value stocks. SCHD is about flat this year, but higher by over 12% over the past year.
As of this writing, Todd Shriber owned shares of DGRW.
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