Dividend ETFs: How To Select A Winner

Includes: SDY, VYM
by: Tom Lydon

An income generating strategy is going to remain in focus for exchange traded fund investors, especially as Treasury bond yields remain at their lowest levels. There are several dividend ETFs to help investors navigate this trend, but it's not all about finding the fund with the highest yield.

"We believe a number of dividend-yielding exchange traded funds (ETFs) are filling part of the void, but we strongly recommend that investors not just choose an ETF that offers the highest yield, but instead look closely at what's inside the fund's portfolio. Because the prospects for the underlying holdings are going to be a key driver," Todd Rosenbluth, S&P Capital IQ ETF Analyst, wrote in a recent MarketScope report.

S&P Capital IQ ranks over 650 ETF from a holdings-based point-of-view, and of the U.S. focused ETFs that the company reviewed, 64 offer a 12 month yield that is 2% or higher. There are plenty of other factors to consider before investing in a dividend fund, other than yield. Underlying holdings, standard deviation and expense ratio are all important factors.

The following ETFs provide investors with a dividend income stream, and possible capital appreciation:

  • SPDR S&P Dividend ETF (NYSEARCA:SDY) This is the largest dividend ETF, with $9 billion in assets. An expense ratio of 0.35% and a standard deviation of 14.9 are attractive, plus it touts a tight bid/ask spread. Consumer staples, financials and industrials dominate the index.
  • Vanguard High Dividend Yield Index Fund (NYSEARCA:VYM) With $3 billion in assets, this is the second largest dividend fund to gain a top ranking with S&P Capital IQ. A low expense ratio of 0.13%, standard deviation of 14.4 are a plus, and also, a tight bid/ask spread are attractive. Consumer staples, energy and health care dominate the 400 stock index.

Tisha Guerrero contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.