The Full List
- U.S. dividend ETFs select stocks by the level, consistency or growth of their dividend payments, and cover the broad market (DVY, CVY, LVL, FDL, PFM, PEY, SDY, VIG, VYM, DTD, DHS, DTN) or divide the market into large caps (NYSEARCA:DLN), mid caps (NYSEARCA:DON) and small caps (NYSEARCA:DES).
- International dividend ETFs come in a few varieties. Some cover all or most foreign markets with a single dividend ETF (DWX, IDV, DEW, DTH, DOO, FGD). Others break up foreign markets into large caps (NYSEARCA:DOL), mid caps (NYSEARCA:DIM) and small caps (NYSEARCA:DLS). Regional dividend ETFs cover emerging markets (NYSEARCA:DEM), Europe (DEB, FDD), Japan (NYSEARCA:DXJ), the Middle East (NASDAQ:GULF) and Pacific ex-Japan (DND). Small cap foreign dividend ETFs are available for emerging markets (NYSEARCA:DGS), Europe (NYSEARCA:DFE) and Japan (NYSEARCA:DFJ).
What Are They?
- Dividend ETFs track indexes in which stocks are weighted by their dividend payments. Some of these ETFs also take account of the dividend yield (the percentage of the stock's market cap paid out as a dividend each year), whether the dividend has been sustained or risen over time, and for how long the stock has paid a dividend.
- Dividend ETFs cover broad indexes, US and foreign stocks, and individual sectors. Broad US dividend ETFs are those that pick the dividend paying stocks from the broad US indexes, and cover multiple sectors in a single ETF.
Why & How To Use Them
- Proponents of dividend-paying stocks argue that they have outperformed the broad market in the long-term (see Further Reading below). Income-oriented investors, for example those in retirement, may also want to raise the income yield of their portfolios.
- If you accept the case for dividend-paying stocks, there are two ways to use these ETFs: (1) Build a portfolio entirely from dividend-paying stocks, for example using the WisdomTree ETFs. (2) Construct a portfolio tilted to dividend-paying stocks by adding one or more of these ETFs to a portfolio of broad index ETFs.
What to Look Out For
- Compared to broader index ETFs, dividend-paying ETFs tend to have higher expense ratios and wider buy-sell spreads (which makes them more costly to buy and sell). Since the higher fees come out of the dividends paid, that reduces some of the extra yield.
- While dividend-paying stocks have a good track record, the theoretical case for them is controversial. All else being equal, dividend-paying stocks should be less desirable than stocks of companies that buy back stock if the investor pays the same taxes on dividends as on long term capital gains.
- You can track dividend index performance on Seeking Alpha's Dividends Dashboard.
- The case for dividend-paying stocks is outlined in this interview with Luciano Siracusano, Director of Research for ETF Firm WisdomTree Asset Management (it also contains useful discussion of WisdomTree's ETFs). See also Why I Love Dividends by David Van Knapp, Buybacks Vs. Dividends: Focusing On The Long-Term by Roger Ehrenberg, Are Dividends Irrelevant, Or Even Harmful? by Kurtis Hemmerling.
- The theoretical case against dividend-paying stocks is outlined in Why Dividend Paying Stocks are a Mistake (David Jackson) and Yield Investing: Dissent on Dividends (David Merkel), and an argument for using a small cluster of individual stocks instead of ETFs is made in High Dividend ETFs: Who Needs 'Em? (Geoff Considine).
- David Van Knapp, a dividend growth investor, makes the case against using dividend ETFs in Dividend ETFs Under The Microscope, 3 More Dividend ETFs Under The Microscope and WisdomTree Dividend ETFs, Plus Overall Conclusions About Dividend ETFs.
- Accounting for Leverage with High Dividend Strategies (Geoff Considine) discusses construction and evaluation of income generating portfolios.
- Differences between these ETFs are substantial. Useful articles in sorting through them: New Vanguard High Dividend Yield ETF: Questioning The Methodology (Where is the Yield?), CVY Looks to Double the Yield of Other Dividend-Paying ETFs (Carla Pasternak), Claymore's New High Income ETF: Markedly Different Than Its Peers (Matt Hougan), Two Reasons I Really Like the WisdomTree ETF Family (Russell Bailyn).
- Dividend-weighted ETFs include: Broad US Dividend ETFs, International Dividend ETFs and US Market Cap/Dividend ETFs.
This page is part of The Seeking Alpha ETF Selector which sorts ETFs by type, highlights how to use them and what to look out for, and provides links to articles that discuss key issues for investors.