Dividend growth ETFs offer a convenient and diversified way to invest in companies that consistently grow their dividends. Certainly, dividend-paying stocks provide a predictable stream of cash flows to investors looking for extra income. Companies that steadily grow their dividends year over year are known as dividend aristocrats. Investors often view high dividend blue-chip companies as financially stable and less volatile than growth companies. Above all, the extra cash from dividends provides a buffer from market volatility. Many retirees use dividends to supplement their income during retirement. In the current low-interest environment, dividend growth ETFs are a compelling low-cost option for investors looking for extra yield. With a 10-year US treasury paying below 1%, income investors will need to look elsewhere for income. Furthermore, compared to mutual funds, exchange-traded funds offer an inexpensive and tax-efficient way to invest without worrying about annual capital gains distributions.
Our top Dividend Growth ETF picks
I have prepared a list of my favorite five dividend growth ETFs. Besides their shared focus, these dividend ETFs have a different approach in constructing their underlying portfolio. Depending on your goals, each ETFs will give you a different exposure and dividend payout.
Dividend Growth ETF Performance 2010-2019
|Ticker||CAGR||St Dev||Best Year||Worst Year||Max. Drawdown||Sharpe Ratio||US Mkt Correlation|
Vanguard High Dividend Yield ETF – VYM
Vanguard High Dividend Yield ETF, VYM, tracks the FTSE High Dividend Yield Index. The index selects high-dividend-paying US companies and weights them by market cap. The underlying index excludes real estate investment trusts (REITs).
VYM ETF offers a low-cost, diversified, conservative exposure to high dividend yield large-cap stocks. Vanguard High Dividend Yield ETF charges 0.06% fee and currently pays a 3.2% dividend yield.
The ETF selects its holdings by ranking companies by their forecast dividends over the next 12 months. Only the stocks in the top half are selected. The remaining stocks are weighted by market capitalization. Due to its methodology, VYM tends to hold a large basket of large-cap value stocks.
SPDR® S&P Dividend ETF – SDY
SPDR® S&P Dividend ETF, SDY, tracks a yield-weighted index of dividend-paying companies from the S&P 1500 Composite Index. SDY uses dividend sustainability screens and only holds companies that have increased dividends for the past 20 years. The highest yielding firms are then weighted by dividend yield.
Many tech companies do not meet the strict requirements of paying dividends in the past 20 years. Therefore, SPDR® S&P Dividend ETF has minimal exposure to technology stocks. Nevertheless, SDY is one of the few dividend growth ETFs that provides exposure to REITs.
SPDR® S&P Dividend ETF charges 0.35% fee and pays a 2.6% dividend yield. Unlike VYM, which ranks its holdings by market capitalization. SDY has a slight tilt towards mid-cap stocks. Investors looking for a broader exposure to the US dividend-paying stocks may find this ETF compelling despite its higher fee.
Vanguard Dividend Appreciation ETF – VIG
Vanguard Dividend Appreciation ETF, VIG, is the most growth-oriented ETF on our list of Dividend growth ETFs. VYM is the largest fund by assets under management (AUM). It tracks a market-cap-weighted index of US companies that have increased their annual dividends for ten or more consecutive years. VIG charges a 0.06% fee and pays a 1.8% dividend. Notably, this ETFs dividend yield is a tad smaller than the yield on the S&P 500.
VIG focuses on dividend growth rather than dividend yield. The fund selects firms that have increased their dividend payments for the past ten years and market-cap-weights its holdings. VIG has the biggest exposure to large-cap and mid-cap growth stocks. In conclusion, investors looking for exposure to high-quality dividend-paying large-cap stock may wish to consider VIG for their portfolios.
iShares Select Dividend ETF – DVY
iShares Select Dividend ETF offers the highest dividend yield on our list of Dividend growth ETF. DVY pays 3.7% in dividends and charges 0.39% in fees. DVY tracks a dividend-weighted index of 100 US companies. The index selects dividend stocks from the Dow Jones broad market-cap index, excluding REITs.
DVY offers exposure to the US high-dividend stocks that skews towards large, mid, and small-cap value firms paying consistent dividends. DVY’s methodology has a strict sustainability screen, designed to select companies that pay steady and rising dividends. The screening process includes companies with at least $3 billion of market capitalization. Further on, the ETF selects stocks with five-year dividend growth, a coverage ratio of 167 or higher, positive trailing 12-months earnings per share, and high trading volume. The DVY portfolio has significant sector bets towards utilities and financial services.
First Trust Value Line® Dividend ETF – FVD
First Trust Value Line® Dividend ETF, FVD, aims to track an equal-weighted index of dividend-paying companies. The ETF uses a proprietary screening process that only includes companies with more than $1 billion in market cap. FVD has the highest fee on our list. It charges 0.7%, and it pays a 2.1% dividend. FVD has the best 10-year performance and has reported a slightly lower risk of all five ETFs. Despite its higher than average performance, it produces one of the lowest yields in the group.
FVD creates its portfolio in two steps. First, it uses Value Line’s proprietary ‘safety rating’ system to select low-beta stocks from companies with strong balance sheets. Then it chooses the stocks with above-average yields and weights them equally. The methodology includes REITs and foreign ADRs. As a result, FVD has the highest exposure to international stocks in our list of Dividend growth ETFs. FVD makes big sector bets towards utilities and financial services.
Additionally, it has a slight tilt towards mid-cap stocks. Despite its higher than average performance, FVD produces one of the lowest yields in the group. In conclusion, investors willing to accept the high cost of FVD may like to use it as an alternative to the more popular dividend growth ETFs.
Dividend Growth ETF Summary
As a group, dividend growth ETFs offer a steady income for yield-hungry investors. Even though none of them have outperformed the S&P 500 in absolute terms, most of these ETFs reported better risk-adjusted returns. In times market turmoil and uncertainty, dividend growth ETFs offer extra income and lower volatilty.
Past performance does not guarantee future returns. Nothing in this article should be construed as a solicitation or offer, or recommendation, to buy or sell any security. The content of this article is the sole opinion of the author and Babylon Wealth Management. The opinion and information provided are only valid at the time of publishing this article. Investing in these asset classes may not be appropriate for your investment portfolio. Before investing, you have to consider your risk tolerance, investment objectives, asset allocation, and overall financial situation. Different investors have different financial circumstances, and not all recommendations apply to everybody. Seek advice from your investment advisor before proceeding with any investment decisions. Various sources may provide different figures due to variations in methodology and timing,
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