Choosing The Right Dividend ETF

Includes: DOO, DTN, DVY, HDV, SPLV
by: Tom Lydon

Dividend exchange traded funds have attracted investors looking for yield and stability in volatile markets. However, they need to perform some due diligence and understand how these ETFs works and the potential risks.

ETFs with a “dividend” appellation have more than doubled over the last year, attracting $26.6 billion in assets, writes Sarah Morgan for SmartMoney.

According to Morningstar data, the asset class seems to garner more assets during times of heightened volatility. Dividend-paying stocks are usually less volatile than the broader market, Todd Rosenbluth, fund analyst with Standard & Poor’s, added, in the report.

Industry observers also note that with Treasury and money-market yields at record lows, income-focused investors are looking toward dividend stocks.

For instance, while the S&P 500 yields 2.1% and is down around 3.3% for the year, the utilities sector, which has a yield of 4.2%, is up about 8.4% year-to-date. Consumer staples, which has a yield of 2.9%, is up 5.2% and healthcare stocks, which yield 2.2%, are up 4.8%.

“We’ve seen investors gravitate towards companies that are perceived to be safer investments,” Rosenbluth commented.

However, “If you just sort by dividend yield you tend to get companies that are in a distressed state,” Timothy Strauts, an ETF analyst at Morningstar, cautioned. Additionally, some broader dividend ETFs showed higher volatility because of their exposure to the financial sector — financials are more sensitive to economic growth or recessionary fears, Strauts added.

In the SmartMoney report, Strauts suggests low-risk dividend ETFs like the iShares High Dividend Equity ETF (NYSEARCA:HDV), which screens out high-risk companies, or the PowerShares S&P 500 Low Volatility ETF (NYSEARCA:SPLV), which screens for stocks with the least volatility over the last 12 months. While SPLV is not a dividend ETF, stocks with low volatility tend to be decent dividend payers.

Additionally, WisdomTree offers two funds that exclude the riskier financial sector, including the WisdomTree Dividend ex-Financials (NYSEARCA:DTN) and WisdomTree International Div ex-Financials (NYSEARCA:DOO). It should be noted that foreign companies usually payer higher dividends, and emerging market dividend-payers offer higher yields but come with greater risk. Strauts also warns that international funds may hold heavier weightings in select countries with high dividend-paying companies.

One of the largest dividend-themed ETFs by assets under management is iShares Dow Jones Select Dividend (NYSEARCA:DVY).

WisdomTree Dividend ex-Financials ETF (DTN)

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Max Chen contributed to this article.

Disclosure: Tom Lydon’s clients own DVY.