Low-cost income from a select few ETFs
Many index-based ETFs have ultra-low cost structures. But while there are more than six-dozen ETFs in the U.S. market that have expense ratios under 0.10%, only five have a dividend focus.
Adding dividend payers to an equity portfolio can help to add stability as well as income. Here’s a closer look at the ETFs that let you buy dividend-paying stocks on the cheap:
iShares Core Dividend Growth (DGRO, expense ratio: 0.08%) holds more than 400 equity positions. Launched in June 2014, it is based on the Morningstar US Dividend Growth Index. That index requires constituents to have at least five years of dividend growth, an indicated dividend yield below the top 10% of the universe, a positive earnings consensus and a payout ratio of less than 75%. Dividends must be qualified. Individual stocks are capped at a 3% weighting. Largest sectors are information technology, health care and financials. DGRO’s total return in 2016 was 15.27% vs. the S&P’s 11.96%.
iShares Core High Dividend (HDV, 0.08%), which went public in March 2011, owns 75 stocks from the Morningstar Dividend Yield Focus Index. That index requires its dividend-paying holdings to have a wide moat and a Morningstar Distance to Default score in the top 50% within its sector. The latter score compares a firm’s assets to its liabilities. The top 75 companies by indicated yield are included. The index is dividend-dollar-weighted. Largest sectors are consumer staples, energy and health care. REITs are excluded. In 2016, HDV’s total return was 15.79%.
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Schwab U.S. Dividend Equity (SCHD, 0.07%) tracks the Dow Jones U.S. Dividend 100 Index, which requires member companies to have paid dividends for at least 10 years and have a minimum market cap of $500 million. Potential index components are screened on four factors: cash flow to total debt, return on equity, dividend yield and five-year dividend growth. Issues are ranked by yield, with preferred stocks, REITs, and MLPs excluded. The index uses a modified market cap weighting with limits on individual stock and sector weightings. Consumer stocks, technology and industrials are the largest sectors. SCHD, launched in October 2011, had a 16.25% total return in 2016.
Vanguard Dividend Appreciation (VIG, 0.09%) is the oldest of the inexpensive dividend ETFs, first offered to the public in April 2006. The fund tracks the Nasdaq U.S. Dividend Achievers Select Index, which includes common stocks with at least 10 consecutive years of dividend growth. REITs are excluded and the index uses proprietary screens to eliminate stocks with low dividend growth potential. At the end of 2016, the fund held 186 positions and the largest sectors were industrials, consumer goods and consumer services. Last year, VIG had a total return of 11.84%.
Vanguard High Dividend Yield (VYM, 0.09%) was launched just seven months after its sibling VIG. The fund is based on the FTSE High Dividend Yield Index, a subset of the FTSE USA Index. All the dividend payers in that index are ranked by their indicated 12-month consensus dividend yield and roughly the top half of that universe constitutes the benchmark. REITs are excluded. At the end of 2016, the ETF held 420 positions with financials, technology and consumer goods the largest sectors. In 2016, VYM had a total return of 16.87%.
Over the past year, none of these ETFs beat the total return of the benchmark S&P 500, but on a risk-adjusted basis some fare better. Three of the funds had higher three-year Sharpe ratios than the “500.” And two of them, SCHD and VYM, had higher five-year Sharpe ratios than the S&P. All had greater 12-month yields than the S&P, ranging from VIG’s 2.11% to HDV’s 3.31%.