One of the common questions I would get as a financial advisor was “Do you have an investment that pays income.” A great way to achieve this is through a subset of Exchange Traded Funds (ETFs) is the Dividend ETFs or ETFs that strive to invest in stocks that pay regular, high dividends. The objective of this article is to give our readers the best 3 dividend ETFs for 2021.
What is a high dividend stock?
While there is not an “official definition,” these are typically stocks that are known as blue-chips that pay a dividend. In other words, established, big businesses that have a history of steady dividend payouts, and not expected to face significant headwinds to performance in the immediate future. Some examples of companies are AT&T, IBM, and 3M.
What is an ETF?
In the past, investors would have to have to buy a bunch of dividend stocks and/or bonds to create a portfolio. An ETF is a bucket of stocks in which an investor can buy a share that contains all the stocks.
Why do some investors prefer dividend ETFs?
Different investor classes have different preferences. Dividend ETFs are preferred by investors who:
- Prefer a steady income from their holdings
- Have a lower capacity or willingness to take investment-related risks
- Might be looking at balancing out an otherwise riskier portfolio with some lower-risk setoffs
- ETFs management ratios (MERs) are generally much lower than mutual funds that focus on giving dividend yields,
- Have a tax advantage over mutual funds
What are the top 3 dividend ETFs?
If you excluding funds with under $50 million AUM, and leaving out inverse and leveraged ETFs, you will have about 100 funds to choose from in the dividend ETF world. The ETFs with the best 3-year trailing total return for 2021 are:
- Invesco S&P 500 Quality ETF (SPHQ): Large-cap ETF focused on US growth stocks, tracks S&P 500 High-Quality Rankings Index (HQRI), a composition of S&P 500 stocks that have stable earnings, dividend payouts and are candidates for long-term growth. HQRI assigns a Quality Score based on Return on Equity, Accruals Ratio, and Financial Leverage Ratio. Consumer technology devices and services company Apple Inc., graphic processors and computer chips maker NVIDIA Corp., and consumer products giant Procter & Gamble Co. are its three largest holdings.
- WisdomTree Global ex-U.S. Quality Dividend Growth Fund (DNL): Tracks the Wisdom Tree ex-US Growth Index, which focuses on large caps in developed and emerging markets and includes dividend-paying companies. Of the 1000 biggest companies by market value, the index selects the top 30% based on its ‘growth score.’ The ETF narrows it down to companies with both growth and attractive dividends. In its category, the ETF has amongst the highest expense ratios. Danish pharma company Novo Nordisk A/S, tobacco manufacturer British American Tobacco PLC of UK, and Australian iron-ore explorer and producer Fortescue Metals Group Ltd. are its three biggest holdings.
- Vanguard Dividend Appreciation ETF (VIG): Targets growth equities based on the 180-stock NASDAQ US Dividend Achievers Select Index which tracks stocks with increasing dividends continuously for a minimum of 10 years. This makes it attractive for investors interested in a long-term view. Software and Cloud Services company Microsoft Corp., MNC retailer Walmart, and consumer products company Procter & Gamble constitute its three largest holdings.
| Ticker | DNL | SPHQ | VIG |
| Category | Foreign Large Growth | Large Blend | Large Blend |
| 3-Year Return | 34.10% | 40.40% | 37.30% |
| 3-Year Return vs S&P 500 | -7.40% | -1.00% | -4.20% |
| Beta 3-Year | 0.85 | 0.98 | 0.9 |
| Net Assets ($M) | $297 | $2,405 | $64,461 |
| Expense Ratio | 0.58% | 0.15% | 0.06% |
| Benchmark | MSCI ACWI Ex USA NR USD | S&P 500 TR USD | S&P 500 TR USD |
