The 10 Most Popular Dividend ETFs
2.5% to 6.7% Yields
Bonus: A Small-Cap Emerging Markets ETF
I want to begin today with a little confession: while I can and do recommend all types of income-generating investments in Cabot Dividend Investor, including ETFs and other funds, I have to admit a personal fondness for individual stocks.
I like being able to really dig into a company’s financials, business and history. Most of all, I like to have a good story to latch onto, and there are just not a lot of compelling stories in the fund universe.
Nevertheless, I understand why many investors want to include funds in their income portfolios. Funds provide instant diversification, and can generate consistent income that won’t be derailed by any one dividend cut. Some offer a great way to hold specialty high-yield investments like MLPs without the tax consequences.
And there are a lot of attractive income-generating funds out there, with enough variety that any income investor should be able to find something to meet his or her needs. In fact, there are a lot of non-income focused funds that could still fit very nicely in a variety of income-focused portfolios. Of the top 10 largest equity ETFs that yield over 2.5%, only five could really be considered income funds. The others generate yield simply as a nice bonus. Any could work in the right kind of income-focused portfolio.
Here they are, in descending order of market capitalization.
1. iShares MSCI EAFE Index Fund (EFA) – yield: 2.5%
EFA is one of the non-income-focused ETFs that make the top 10—and it’s the largest, with a market cap of over $54 billion. EFA tracks the MSCI EAFE Index, which holds equities from developed international markets in Europe, Australasia and the Far East (thus EAFE). EFA’s 2.5% yield is no surprise considering its top holdings, a who’s-who of the biggest non-U.S. blue chips. They include Nestlé, Roche, HSBC, Novartis, BP, Toyota, Royal Dutch Shell, Total, GlaxoSmithKline and Sanofi.
EFA actually tracks the U.S. markets, and particularly the Dow, fairly closely, with some deviations when news about Europe is trending. But it could be a good way to get exposure to big international dividend payers like Nestlé and Roche that are otherwise more difficult to buy in the U.S.
2. Vanguard FTSE Emerging Markets ETF (VWO) – yield: 2.9%
Another international fund! This one tracks the FTSE Emerging Markets Index and owns stocks of companies based in markets like China, Brazil, Taiwan and South Africa. It mostly holds large-cap companies (its holdings’ average market cap is $17 billion), accounting for the 2.9% yield. The fund’s current largest holdings are Taiwan Semiconductor Co., Tencent Holdings, China Mobile, China Construction Bank, Petroleo Brasileiro, Gazprom, Industrial & Commercial Bank of China, Value, Naspers and Itau Unibanco. This one is much less correlated to the U.S. markets, and could be a good yield play on general emerging market strength.
An alternative is the SPDR S&P Emerging Markets ETF, which has a lower yield (2%) but otherwise performs very similarly to VWO.
3. Vanguard REIT ETF (VNQ) – yield: 3.9%
The first ETF on our list that could be considered income focused, VNQ tracks the MSCI U.S. REIT Index. It’s fairly non-correlated with both the stock and bond markets, so it offers good diversification. It’s also diversified within the REIT market, so it could be a good choice for investors who feel uncomfortable owning individual REITS (which are highly leveraged and very sensitive to credit conditions). That said, REITs as a group tend to live or die by interest rates and credit market news; owning a fund of them can just amplify those moves. For example, when REITs took an interest rate-related dive in Spring 2013, VNQ performed much worse than some individual REITs.
Also, since VNQ’s distributions are made up of REIT distributions, they’re not necessarily qualified for the lower dividend tax rate. The past two years’ total distributions were made up of about 30% return of capital and capital gains. (A non-Vanguard but lower-yielding option is the First Trust S&P REIT Index Fund, symbol FRI.)
4. Vanguard FTSE Europe ETF (VGK) – yield: 2.7%
Another international fund. This one tracks the FTSE Developed Europe Index. It pays variable dividends and stopped paying dividends altogether for a few months in 2012. Probably not your best play for yield, although it would do if you wanted to bet on Europe for some reason.
5. iShares Select Dividend ETF (DVY) – yield: 3.0%
DVY is a perpetual favorite with income investors. It’s income-focused, so the dividends are much more consistent quarter-to-quarter than those of the other funds on our list so far. DVY is based on the Dow Jones U.S. Select Dividend Index, which tracks 100 stocks selected for their relatively high and consistent yields. It’s limited to stocks in the Dow Jones U.S. Index and doesn’t hold REITs, so they don’t have as much leeway as you do in your own portfolio, but it could be a quick shortcut to a 3% yield if you don’t want to do your own stock selection, or just want to add some diversification to your portfolio. It does track the Dow Jones fairly closely though, so it’s best held when the overall market is healthy.
6. iShares S&P U.S. Preferred Stock Index Fund (PFF) – yield: 6.7%
PFF pays dividends monthly, and has a generous yield. Like individual preferred stocks though, it does not have much upside. Still, it’s worth consideration if you want the yield and non-correlation (with the stock market) of preferred stocks, but don’t want to have to consider the creditworthiness of an individual issuer. The dividends are not as predictable as those you’d get from an individual preferred stock though.
7. Alerian MLP ETF or Oppenheimer SteelPath MLP Funds Trust (AMLP) – yield 6.2%
Another high yielder. AMLP is based on the Alerian MLP Infrastructure Index, and holds publicly traded energy infrastructure MLPs like Enterprise Products Partners (EPD) and Kinder Morgan Energy Partners (KMP). Though you can buy all of the fund’s holdings on U.S. exchanges, AMLP does offer one significant benefit in that it is a regular corporation for tax purposes, so investors in the ETF don’t have to deal with K-1s as investors in individual MLPs do (you just get a single 1099). This makes AMLP a good way to get the yield benefits of MLPs in a tax-advantaged account like an IRA. (The UBS E-TRACS Alerian MLP Infrastructure Index, symbol MLPI, is an alternative that tracks the same index.)
8. iShares China Large-Cap ETF (FXI) – yield: 2.9%
Similar to VWO in many ways, FXI is based on the FTSE China 25 Index, which tracks the largest companies in the Chinese equity market. Many of the large-caps pay dividends, generating FXI’s 2.9% yield. The fund only makes distributions twice a year though (one large, one small) so it’s not the best choice for investors who want consistent income. It is a good way to play the overall Chinese market though.
9. Utilities SPDR (XLU) – yield: 3.6%
XLU owns utility sector stocks and manages to wring a 3.6% yield out of the sector. The fund is weighted toward the highest-yielding utilities. The 10 largest holdings are Duke Energy, Dominion Resources, NextEra Energy, Southern Co., Exelon, American Electric Power, Sempra Energy, PPL, PG&E and Public Service Enterprise Group. The top five holdings all yield more than the fund overall, so if yield is your top priority, it’s probably worth it to look into those individually instead. Top holding Duke Energy performs pretty much in line with the fund most of the time, while number two holding Dominion has been outperforming XLU recently.
10. iShares Dow Jones Real Estate ETF (IYR) – yield: 3.5%
Rounding out the list at number 10 is $4.5 billion market cap IYR, which tracks the Dow Jones U.S. Real Estate Index. Top holdings are a diverse group of real estate companies and REITs, including Simon Property Group, American Tower, Crown Castle International, Public Storage, Prologis, Equity Residential, Ventas, HCP, Boston Properties and Weyerhaser. The large number of REITs means some distributions may be classified as capital gains or return of capital, although that has not been the case recently. Distributions are fairly consistent although again you could get a better yield by buying many of the individual components. Still, the fund is probably a better holding for yield than for capital appreciation.
BONUS: WisdomTree Emerging Market Small Cap Dividend Fund (DGS) – yield: 3.5%
With a market cap of $1.72 billion DGS doesn’t quite qualify for my screen, but it’s worth an honorable mention for its strong yield and unusual focus on smaller, emerging market companies. Both types of stocks tend to be underrepresented in income-focused portfolios, so DGS could be an easy way to diversify beyond U.S. large caps without sacrificing yield. Just be aware that the fund’s name is slightly misleading: about one-third of the holdings are actually mid-cap stocks, and the fund’s definition of “emerging markets” is unusual. Management mostly shuns the BRICs in favor of smaller (but often fairly developed) markets like Taiwan, South Korea and Malaysia (which together make up about 50% of the portfolio).
Do you own any of these ETFs? Or do you have a favorite income-generating equity ETF I didn’t mention today? Let me know by replying to this email and I may include your comments in a future article.
Your guide to a secure retirement,
Chloe Lutts Jensen
Chief Analyst, Cabot Dividend Investor