The good news in 2021 is that dividend payments were back after many companies cut or suspended their payments due to Covid-19. Dividend ETFs were the net beneficiary of this return to normalized payouts.
S&P 500 companies increased their dividends last year by more than $70 billion. Morningstar market strategist Dave Sekera believes some of the companies in the index need to up their dividends. However, he believes 2022 will be the year dividend payments return to following earnings.
Luckily for dividend ETFs, Sekera believes that even with rate hikes in 2022 to 1% from 0%, interest rates will still be at levels only seen once before, during the financial crisis of 2008.
So, the long and the short is that dividend-paying stocks should not be affected by what the Federal Reserve does over the next year.
Here are seven dividend ETFs to keep an eye on:
- iShares International Select Dividend ETF (BATS:IDV)
- Amplify CWP Enhanced Dividend Income ETF (NYSEARCA:DIVO)
- SPDR S&P Dividend ETF (NYSEARCA:SDY)
- WisdomTree Emerging Markets High Dividend ETF (NYSEARCA:DEM)
- Invesco Variable Rate Preferred ETF (NYSEARCA:VRP)
- Pacer Global Cash Cows Dividend ETF (BATS:GCOW)
- ProShares S&P MidCap 400 Dividend Aristocrats (BATS:REGL)
Dividend ETFs to Buy: iShares International Select Dividend ETF (IDV)
This iShares ETF is the first of two international funds. IDV tracks the performance of the Dow Jones EPAC Select Dividend Index, a collection of stocks in developed markets that have consistently provided high dividend yields over the long haul.
Launched in June 2007, IDV has a 30-day SEC yield of 4.81%. This provides investors with non-U.S. equity exposure while still generating above-average investment income.
The fund’s $4.8 billion in total net assets is invested in 100 companies of high dividend-paying companies in Europe, Pacific, Asia, Canada (EPAC). There are six criteria for qualifying for inclusion, including paying dividends for the most recent years, positive earnings per share for the trailing 12 months, and float-adjusted market capitalization of at least $1 billion.
This means the stocks included are reasonably large companies that consistently pay dividends and make money. What’s not to like?
The top three sectors by weight are financials (31%), utilities (19.3%), and materials (12.1%). The top three countries are the United Kingdom (23.8%), Canada (10.7%), and Hong Kong (10.1%).
The top 10 holdings account for 31% of the portfolio. The fund’s turnover is 86%, which means it rotates out of the entire portfolio once every little more than 12 months.
Amplify CWP Enhanced Dividend Income ETF (DIVO)
Here’s what the company had to say about its ETF:
“DIVO is an actively-managed ETF featuring high-quality large-cap companies with a history of dividend growth utilizing a tactical covered call strategy on individual stocks.
“DIVO is strategically designed to offer high levels of total return on a risk-adjusted basis. The fund is actively managed by the ETF Sub-Adviser, Capital Wealth Planning, LLC (CWP).”
The company noted that its total assets grew by 356% over the past year. That’s a reflection of investors getting worried about the lengthy bull market coming to an end. DIVO is designed to protect on the downside while providing reasonable risk-adjusted returns.
Morningstar gives DIVO a five-star rating over the past year, three years, and five-year periods. It has an annual distribution rate of 4.7% and a 30-day SEC yield of 1.3%.
Why the 340 basis-point difference?
When an ETF pays out more than the fund generates in a particular period from interest, dividends, and capital gains, that is considered a return of capital. It reduces your adjusted cost base, which means you’ll have higher capital gains when you sell.
That said, it’s not a bad price to pay for the ETF’s risk-adjusted returns. Over the past five years, it has generated an annualized total return of 13.9%. Year-to-date, it is down 4%, less than the market as a whole.
If you want an ETF that plays both offense and defense, DIVO is it.
Dividend ETFs to Buy: SPDR S&P Dividend ETF (SDY)
SDY got its start 16 years ago this past November. It’s grown to $20.4 billion in total assets. That puts it in the top 100 U.S.-listed ETFs by total net assets.
The ETF tracks the performance of the S&P High Yield Dividend Aristocrats Index, a collection of the highest-yielding stocks from the S&P Composite 1500 Index that have increased their dividends for 20 consecutive years or more.
The weighted average market cap of the 119 holdings is $64.4 billion. However, the mixture of small-cap (25%), mid-cap (38%), and large-cap stocks (36%), makes it an excellent ETF to own if you like all-cap ETFs.
A lot of funds say they’re all-cap; SDY truly is. And all for an expense ratio of 0.35%.
From a sector perspective, the top three by weight are financials (17.1%), industrials (16.6%) and consumer defensive (14.9%). The top three holdings are Exxon Mobil (NYSE:XOM), IBM (NYSE:IBM) and Chevron (NYSE:CVX).
Its top 10 holdings account for 19% of the ETFs portfolio. It turns the entire portfolio once every 4.5 years.
Between 2012 and 2021, it had two years in negative territory out of 10. It had a total negative return of 0.73% in 2015 and 2.74% in 2018. In those 10 years, it had four years with an annual return of 20% or more.
Add this one as well to your list of two-way ETFs.
WisdomTree Emerging Markets High Dividend ETF (DEM)
Just as a properly constructed portfolio of non-dividend-paying equities should have a dollop of emerging markets represented, DEM is one of the pieces of the puzzle I’ve chosen to include in today’s group of ETFs.
I’ve always liked WisdomTree’s work in the dividend arena, so it only makes sense that DEM gets the call. Like the name of the fund, it’s designed to invest in companies based in emerging markets with higher than average dividend yields. DEM currently has a 5.5% yield.
The fund’s total net assets are $2.1 billion. It currently holds 492 stocks, with the top three holdings accounting for 15.9% of the portfolio — the top 10 account for 28% of the ETF’s total net assets.
The top three countries by weight are China (24.9%), Taiwan (19.4%) and Brazil (17.5%).
If you’re hesitant to invest in emerging markets, the average market cap is $16.9 billion, and large caps account for 74% of the portfolio.
It charges 0.63%, which might seem high, but it’s the price you have to pay for increased income in emerging markets.
Dividend ETFs to Buy: Invesco Variable Rate Preferred ETF (VRP)
It’s not often I’ll recommend a preferred share ETF, let alone one with variable rate in the name.
What precisely is variable rate? I’ll get to that. But first, let’s consider how the fund is constructed.
VRP tracks the performance of the ICE Variable Rate Preferred & Hybrid Securities Index. The index is a group of preferred shares that are both floating and variable rate U.S. dollar-denominated preferred stock and hybrid debt of U.S. companies. They can be both investment grade and below investment grade.
It’s important to note that the ETFs index changed in June 2021. As a result, the index provider changed from Wells Fargo to ICE Data Indices, LLC.
Risks associated with investing in preferred shares include the fact the issuer may have provisions in the shares that allow for the pausing of distributions for a period of time. That could affect the preferred share’s price. Further, even though the distributions have paused, the ETF might have to report the distribution even though it didn’t get the money.
In addition, preferred shares generally don’t have voting rights and often rank behind all bonds and other debt instruments in terms of repayment. Therefore, it’s important to understand that these securities aren’t as straightforward as equities, but they can play an effective role in one’s portfolio.
VRP currently has 313 preferred shares invested in the ETF’s $2.0 billion in total net assets. It has a 30-day SEC yield of 3.76%. The average coupon of the holdings is 5.19%, while the effective duration is 2.91 years.
The credit quality rating of most of the preferreds is BB or BBB, which account for 94% of the portfolio. It charges 0.50%. I don’t spend much time in the bond area, but it doesn’t seem out of line relative to other preferred share offerings.
Pacer Global Cash Cows Dividend ETF (GCOW)
I love free cash flow. I always have. Even better, I love investing in companies that know how to effectively allocate that free cash flow. It isn’t as easy as it seems.
As you might be aware, dividends are generally paid from free cash flow. It is one of the five uses for free cash flow. The others are share repurchases, debt repayment, acquisitions and investing in the business.
GCOW, like some of Pacer’s other ETFs, focuses on free cash flow, and more importantly, high free cash flow yields. The ETF tracks the performance of the Pacer Global Cash Cows Dividend Index, hence the name.
The index starts with the FTSE All-World Developed Large Cap Index. It then knocks out companies that are expected to have negative free cash flow or earnings over the next two years. It also removes all financial-related companies except for real estate investment trusts.
What’s left is ranked by their free cash flow yield for the trailing 12 months. It takes the top 300 and ranks them again, this time by dividend yield. The 100 top dividend yields are included in the index. Each holding is capped at 2%. It rebalances and reconstitutes twice a year in June and December.
Its 30-day SEC yield is 4.33%. It charges 0.60%, which is a little high for its long-term performance, but it’s important to remember that 68% of the portfolio are holdings outside the U.S. They haven’t done nearly as well over the past decade.
Reversion to the mean makes GCOW attractive right now.
Dividend ETFs to Buy: ProShares S&P MidCap 400 Dividend Aristocrats (REGL)
REGL is the second ETF on this list that focuses on Dividend Aristocrats. However, REGL tends to focus on mid-cap stocks. So, unlike SDY, which had a weighted average market cap of $64.4 billion, this ETFs average is just $7.2 billion, putting it right in the heart of mid-cap stocks.
In fact, it leans heavily into small-cap territory. Small caps account for 69% of the portfolio. Mid caps have a 31% weighting. There are no large caps.
REGL tracks the performance of the S&P MidCap 400 Dividend Aristocrats Index, which is a collection of at least 40 stocks that have increased dividends for 15 years or more. The holdings are equally weighted. The index rebalances four times a year in January, April, July and October. It is reconstituted every January. No sector can account for more than 30% of the index.
The ETF currently has 49 stocks invested in its $1.1 billion in total net assets. It has a 30-day SEC yield of 2%. If you invested $10,000 at its inception in February 2015, it would be worth $20,244 today.
The average investor might be familiar with two or three names in the top 10 holdings. They account for 21% of the portfolio. That’s a result of equal weighting.
I consider mid-cap stocks to be an important part of every portfolio.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.