Monday, May 24, 2010

4 High Yield Dividend ETFs.

Thanks in part to the market crash in 2008, investors have rediscovered the importance of dividends. Dividends are also important in times of high volatility - like we are experiencing these days - because they help to smooth out the bumps and make for a smoother ride. Here are 4 high yield dividend ETFs that help provide dividend exposure, but limit the risk (compared to picking individual stocks).

Vanguard Dividend Appreciation (VIG)

What I like.
The Vanguard Dividend Appreciation ETF focuses on dividend growth and not just dividend yield. It follows an index of companies who have increased their dividend payouts over the past 10 years, and dumps companies that miss payments.

What I don't like so much.
The index is weighted by market cap and currently holds about 200 stocks; including Coke, Proctor & Gamble, and Johnson and Johnson. I don't really like market cap weighting because a few very large companies can dominate the index, and decrease diversification.

The VIG lost about 9% less than the S&P 500 in 2008 (see chart below), currently has a yield of approximately 1.90%, an expense ratio of 0.23% and an annual turnover rate of 20%.

SPDR S&P 500 Dividend (SDY)

What I like.
The S&P SPDR is even more selective than Vanguard Dividend Appreciation. The SPDR's index holds companies of all sizes that have increased dividend payouts every year for the past 25 years. Also, instead of holding 200 stocks and weighting by market cap, the SPDR selects only the stocks with the 50 highest yields and then weights them by yield.

The largest holdings are utilities, industrial and consumer related stocks, and companies that fail to make their dividend payout are cut from the list. The yield at the time of writing this post is 3.56% and the expense ratio is 0.35%.

PowerShares International Dividend Achievers (PID)

Why I like it.
The PowerShares International Dividend Achievers ETF focuses on high yield companies that have increased dividend payouts over the past 5 years and trade on the U.S. stock market as American depository receipts (which means the company must file reports under U.S. accounting standards, so there is less room for the shadier side of book cooking ;-) ). This is a great way to get foreign exposure without sacrificing yield.

What I don't like about it.
With only 5 years of dividend raising, the companies in this basket don't have a long a history as those in the above mentioned ETFs, but maybe the ETFs above are strictly domestic stocks. Also, the expense ratio for PID is 0.57%, and the fund is more active than either VIG or SPY with an annual turnover rate of 50%.

Wisdom Tree Emerging Markets Equity Income (DEM)

Why I like it.
The Wisdom Tree Emerging Markets Equity Income ETF also has foreign exposure, as one might expect by its name, and focuses on dividend paying stocks from emerging market countries. It currently sports a yield of about 2.97% and holds the top 30% of dividend paying emerging market stocks by yield.

What I don't like about it.
33% of its holdings are in Taiwan, which could be a bit too risky for my taste. Also, it doesn't have a long history since it was only launched in 2007. It's also more expensive and active than any other ETF on this list with an expense ratio of 0.63% and a turnover rate of 67%.


steve smith said...

Shouldn't the ticker for SPDR S&P 500 Dividend be SDY instead of SPY?

Mike said...

Right you are sir!

Good catch, and thanks for bringing the mistake to my attention. It has been corrected.

tele said...

hmm, just looking at both the Morningstar and the spdr site ( - the expense ratio for SDY is 0.35%, not 0.09%. In this light VIG looks a bit more attractive... what do you think?

Mike said...

Jeesh! I was really off my game when I posted this... You are correct tele, and thanks for the comment!

I'm not sure about VIG vs. SDY though... the VIG is a tad less expensive, but the yield is quite a bit more on the SDY (VIG is currently 2.00%, and SDY is 3.56%)... depending on how much you're investing, that may make up for the slightly larger expense ratio...

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