- Exchange Traded Funds (ETFs) make it easy to a dose of recession-proof dividends.
- iShares Core Dividend Growth ETF (DGRO): Low-costs and growing payouts are a powerful combination.
- Vanguard High Dividend Yield Index Fund (VYM): Investors looking for more can use this ETF of strong high-yielding blue-chips.
- WisdomTree U.S. SmallCap Dividend Fund (DES): Thinking small can pay dividends too.
- SPDR S&P International Dividend ETF (DWX): Don’t forget to look overseas for strong yields.
- iShares Preferred and Income Securities ETF (PFF): Safety and a high-yield can come from this ignored corner of the market.
- The Real Estate Select Sector SPDR Fund (XLRE): REITs are high-yielding by design.
- Invesco S&P 500 High Dividend Low Volatility ETF (SPHD): Investors can have the best of both worlds.
If there’s one word to describe the current market environment, it would have to be uncertainty. Rising inflation pressures, geopolitical issues, and lower economic growth have all started to increase volatility and drive uncertainty. For investors, that’s a big deal. But there is one way to fight back the turning tide.
That would be a dose of dividends.
Stocks that pay dividends have been less volatile than their non-dividend paying counterparts- just over 1% less volatile according to Merrill Lynch. Better still, this lower volatility has allowed dividend stocks to perform better than the broader market– by about 4% annually since the 1990s. With that in mind, dividends could be a powerful tool to fight the current pressures.
Perhaps the best way to get this dose of dividends is through exchange traded funds (ETFs). With single access ticker, investors can gain broad exposure to a variety of dividend payers. Now, there are some 2500+ ETFs available to buy in the U.S. So how do you know which ETF is right for you? Luckily, InvestorPlace has you covered. Here are seven ETFs with quality dividends for any market environment:
|DGRO||iShares Core Dividend Growth ETF||$50.83|
|VYM||Vanguard High Dividend Yield Index Fund||$110.55|
|DES||WisdomTree U.S. SmallCap Dividend Fund||$30.38|
|DWX||SPDR S&P International Dividend ETF||$37.43|
|PFF||iShares Preferred and Income Securities ETF||$34.25|
|XLRE||The Real Estate Select Sector SPDR Fund||$43.59|
|SPHD||Invesco S&P 500 High Dividend Low Volatility ETF||$47.59|
iShares Core Dividend Growth ETF (DGRO)
When it comes to dividends, investors tend to focus on the yield. But a high headline yield isn’t everything. In fact, those stocks with slightly lower yields that consistently raise them every year have been the real champions when it comes to performance. The reason? Dividend increases tend to be in excess of inflationary rates. As such, dividend growth is where the real money can be made.
The iShares Core Dividend Growth ETF (NYSE:DGRO) is a great place to find that strength.
As the name suggests, the ETF tracks an index of U.S. stocks that have grown their payouts year in and year out. The kicker for the ETF is that it also screens for measures of sustainability of dividend. This means firms with poor cash flows or other shaky financial metrics get kicked out of the index. What investors are left with are 418 large- and mid-cap stocks who are some of the strongest dividend growers around. Top holdings in DGRO include Home Depot (NYSE:HD) and Apple (NASDAQ:AAPL).
The results for the ETF have been wonderful as well. Since its inception in 2014 and through the end of April, DGRO has managed to produce a 11.91% annual return. That return has come with less volatility and a growing 2.13% 30 Day SEC Yield.
With rock-bottom expenses of 0.08%- or just $8 per $10,000 invested- DGRO makes a perfect choice for investors looking to add the power of dividend ETFs to their portfolios.
Vanguard High Dividend Yield Index Fund (VYM)
But what if you just want a high headline yield? After all, we still have to pay our mortgages and go grocery shopping. That requires steady income. And these days, it requires more of it. This is where the Vanguard High Dividend Yield Index Fund (NYSE:VYM) comes into play.
VYM does focus on a big yield — via the FTSE High Dividend Yield Index — and currently pays nearly 3%. However, investors shouldn’t be too concerned. The ETF isn’t filled with risky stocks with super high yields. The kind referred to as “dividend traps.” VYM’s index is based on forecasted high dividends — this implies that various screens are added to make sure the firm’s keep paying those dividends. As a result, stocks that fail to meet the screens of the index are kicked out or not included. What investors are left with is a basket of high yielding blue-chips.
As expected, the ETF leans towards more “boring” segments of the market — with financials, consumer staples, and industrials being the top sectors in the fund. There’s nothing wrong with that given its focus of a high-yield, but investors need to understand that VYM won’t be a capital appreciation engine like other ETFs.
But for those investors looking for more income right now, you can’t go wrong with the fund. It’s low 0.06% in expenses help drive home the investment thesis.
WisdomTree U.S. SmallCap Dividend Fund (DES)
When it comes to dividends, most investors think big. The idea is that larger firms are the only stocks that have the ability to pay dividends. As a result, small-caps are regulated to the growth bin. But that misnomer can be costing investors some really good income. The truth is, there are plenty of small-cap stocks that pay dividends and have the fiscal responsibility to do so.
The WisdomTree U.S. SmallCap Dividend Fund (NYSE:DES) is still the best way to do just that.
WisdomTree cut its teeth on being on the first firms to offer fundamentally weighted indexes — better known as smart-beta. DES is no different and tracks a proprietary index that weights small-caps based on the aggregate cash dividends each stock is projected to pay over the next year. Top holdings include stocks like utility South Jersey Industries (NYSE:SJI) and tobacco stock Vector Group (NYSE:VGR). All in all, you’re looking more than 670 different dividend small-caps — many of which, you’ve probably never heard of.
And that’s just the point. With DES, you have quick access to an opportunity set most investors completely ignore. With strong long-term returns, a high 2.99% monthly paid yield, and a low 0.38% expense ratio, the WisdomTree U.S. SmallCap Dividend Fund is a great addition to any income portfolio.
SPDR S&P International Dividend ETF (DWX)
If U.S. investors are woefully underweighting the opportunity in small-cap dividends, then they are completely blind to the dividend potential of international stocks. That’s a shame as these dividends can be a powerful tool for fighting inflation and gaining extra yield. The reason is how many foreign stocks pay their dividends in the first place.
Rather than do a set amount each quarter, many international stocks pay semi-annually as a percentage of profits each year. That flexibility allows for them to hand out more cash during boom years and save funds during busts. Moreover, international stocks tend to have a more dividend friendly culture. Thanks to major family and state-based ownership structures, dividends are a preferred way to extract profits from a business rather than sell off shares. The end result tends to be higher, yet variable yields.
The $600 million SPDR S&P International Dividend ETF (NYSE:DWX) is still one of the best ETFs to purely tap into the opportunity. DWX tracks the 100 highest dividend-yielding common stocks and American depositary receipts
(ADRs) in the developed world outside of the United States. Canada, Switzerland and Japan round out the top three country holdings. Access to Canada is particularly interesting because despite being home to some of the world’s largest multinationals, the nation is completely ignored in a variety of bread and butter indexes.
Performance for DWX has been mixed over its history and has reflected the preference of U.S. stocks since the Great Recession. However, with low expenses and a big 4.48% yield, this ETF is a top choice to boost income.
iShares Preferred and Income Securities ETF (PFF)
Given the markets current woes, strong income with a side of safety could be the answer to getting through the rest of the year intact. For this, preferred stocks may be the, well, the preferred choice. These hybrid securities blend the attributes of bonds — steady dividends and a callable par value — with those of stocks — daily tradability and are considered “equity” on a balance sheet.
Access and gaining information about preferred stocks is pretty much impossible for average joes. It can be a daunting task to buy individual shares. ETFs make adding these hybrid securities easy.
With over $15 billion in assets, the iShares Preferred and Income Securities ETF (NASDAQ:PFF) is the dominating fund in the sector. PFF tracks nearly 500 preferred stocks from firms like J.P. Morgan (NYSE:JPM), NextEra Energy (NYSE:NEE), and Citigroup (NYSE:C). Financials and utilities dominate the ETFs holdings. But that’s to be expected as these sectors are the largest issuers of preferred shares in the first place.
Rising interest rates do have an effect on preferred shares — at least initially. However, the callable par value does protect investors and limits downside to shares. Meanwhile, PFF’s high 5.54% monthly dividend provides maple income in the current environment. Now, returns for the ETF aren’t going to hit it out of the park: producing 4.45% annually or basically the dividend for the last decade. But as a steady-eddy anchor for a portfolio, PFF is one of the best dividend ETFs around.
The Real Estate Select Sector SPDR Fund (XLRE)
Some sectors by nature are dividend machines. Real estate through real estate investment trusts (REITs) is one such sector. Thanks to Congress, REITs were created as a way for regular people to own commercial property. The hallmark of REITs is that they must distribute the bulk of their cash flows back to investors and for doing that, they can avoid corporate taxes. Because of this, these pass-through entities often have yields in the 4% – 7% range.
Given the sheer variety of property types, operating locations, and number of REITs out there, ETFs can make it easy to add a dose of the sector and its hefty yields to a portfolio. The Real Estate Select Sector SPDR Fund (NYSE:XLRE) makes adding exposure really easy.
The Select Sector SPDRs are a pretty simple ETF suite and track their respective sectors in the S&P 500 Index. The XLRE is no different and holds the 30 REITs in the index. Names like Simon Property Group (NYSE:SPG) and Public Storage (NYSE:PAS) are some of the largest real estate owners in the country. With this ETF, investors have access to that massive portfolio of shopping malls, apartments, office buildings, and even hospitals. More importantly, the cash flows and the 2.63% yield that these properties throw-off.
With brisk trading volume and low expenses, the XLRE is one of the best ways to add REITs and their dividends to an income portfolio.
Invesco S&P 500 High Dividend Low Volatility ETF (SPHD)
By nature, dividend stocks are already low volatility options for portfolios. But with the market still plunging and gyrating, investors may want a bit more stability. What if there was a way to focus on the even lower volatility, without sacrificing income. The Invesco S&P 500 High Dividend Low Volatility ETF (NYSE:SPHD) could be the answer.
As its name implies, SPHD is sort of a blending of two ideals. Its index first screens for the highest yielding stocks in the S&P 500. It then sorts the stocks by lowest yearly average volatility. It then selects the 50 best stocks meeting these criteria. The low-volatility requirement kicks any less-than-ideal dividend payers, while the high yield aspects keep the income robust. Current top holdings include pipeline stocks Kinder Morgan (NYSE:KMI) and Williams (NYSE:WMB) and utility PPL (NYSE:PPL).
The proof of concept is in the pudding. While SPHD has underperformed the S&P 500 over low stretches of time, it has been amazing in downturns. Year-to-date, the broad index has lost about 12%. SPHD? Is actually up by 4.12%. Part of that positive return has been due to dividends. SPHD currently yields 3.67%.
Perhaps the best way to use the fund would be in pairing with an S&P 500 ETF. This way, investors can limit their downside risks and losses, while still capturing much of the market’s upside. With a low expense ratio of just 0.30%, this pairing is easy to digest.