Dividend exchange-traded funds (ETFs) are designed to invest in a basket of dividend-paying stocks. Stable, attractive dividends tend to be associated with larger, less risky, top-tier companies, although any company can share its earnings with shareholders, and some of the highest returns are offered by smaller, less established names. Many ETFs operating in this space favor stable income with room to grow. However, others may seek higher and potentially less secure dividend payouts, in the hopes that these generous payouts will be sustainable and not harm the company’s finances or future growth prospects.
Dividend ETFs are often favored by more risk-averse and income-seeking investors. Investors also use them to balance riskier investments in their portfolios. In addition to offering a regular income stream, these ETFs often offer much lower management expense ratios (MERs) than dividend-focused mutual funds.
- Dividend exchange-traded funds (ETFs) outperformed the broader US market last year.
- The dividend ETFs with the best one-year total returns are FDL, HDV and DHS.
- The largest holding of each of these funds is Exxon Mobil Corp.
There are 109 smart beta dividend ETFs that are traded in the US, excluding inverse and leveraged ETFs, as well as funds with less than $50 million in assets under management (AUM). Dividend stocks, as measured by the benchmark S&P 500 Dividend Aristocrats, outperformed the broader market last year. The index provided a one-year total return of -3.7% compared to -11.0% for the S&P 500 as of September 1, 2022. The best performing dividend ETF, based on last year’s performance, is the First Trust Morningstar Dividend Leaders Index Fund (FDL).
We look at the top three dividend ETFs for Q4 2022 below. All numbers are as of September 1, 2022. To focus on the funds’ investment strategy, the top holdings listed for each ETF exclude cash holdings and holdings purchased with securities borrowing proceeds, except in unusual cases, such as when the cash tranche is exceptionally large.
- Performance in one year: 11.0%
- Expense Rate: 0.45%
- Annual dividend yield: 3.58%
- Three-month average daily volume: 1,142,157
- Assets under management: US$ 3.3 billion
- Start date: March 9, 2006
- Issuer: First Trust
The FDL seeks to track the Morningstar Dividend Leaders Index, an index comprised of companies listed on the NYSE, NYSE Amex or Nasdaq that have demonstrated dividend consistency and sustainability. The index does not include real estate investment funds (REITs), traditionally a type of security that provides strong dividends. The ETF primarily invests in large caps and uses a blended approach, holding both growth and value stocks. Energy stocks represent the largest portion of the fund’s portfolio at 20.2%, followed by financial and consumer goods companies.
FDL’s main holdings include Exxon Mobil Corp. (XOM), a global oil and gas company; AbbVie Inc. (ABBV), a biopharmaceutical company known for the immunosuppressant drug Humira; and Verizon Communications Inc. (VZ), a major telecommunications service provider.
- Performance in one year: 7.7%
- Expense Rate: 0.08%
- Annual dividend yield: 3.41%
- Three-month average daily volume: 1,195,143
- Assets under management: US$ 12.2 billion
- Start date: March 29, 2011
- Issuer: BlackRock Financial Management
The HDV aims to track the Morningstar Dividend Yield Focus Index, which is made up of 75 established US stocks that pay relatively high dividends. Health stocks represent more than 22% of the portfolio, followed by energy and consumer goods companies. The fund focuses on large cap stocks that represent both value and growth characteristics.
HDV’s portfolio is heavily concentrated, with the top 10 holdings representing over 48% of invested assets. The three main names in the portfolio are Exxon Mobil; Johnson & Johnson (JNJ), a pharmaceutical, medical device and consumer goods company; and Chevron Corp. (CVX), a global oil company.
- Performance in one year: 6.9%
- Expense Rate: 0.38%
- Annual dividend yield: 3.79%
- Three Month Average Daily Volume: 78,606
- Assets under management: US$ 1.2 billion
- Start date: June 16, 2006
- Issuer: WisdomTree
The DHS tracks the WisdomTree US High Dividend Index, an index of dividend-earning companies rated based on projected dividends for the coming year, as well as factors such as value, quality and momentum. The fund targets large cap US equities. Energy, pharmaceutical biotechnology and life sciences, and food beverage and tobacco stocks make up the majority of the fund’s portfolio, comprising more than 55%.
DHS’s main holdings include Exxon Mobil; Chevron; and Coca-Cola Co. (KO), a global beverage producer and seller.
The comments, opinions and analysis expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations for investing in any security or adopting any investment strategy. While we believe the information provided in this document to be reliable, we do not guarantee its accuracy or completeness. The views and strategies described in our content may not be suitable for all investors. As economic and market conditions are subject to rapid change, all comments, opinions and analysis contained in our content are as of the date of posting and may change without notice. The material is not intended to be a complete analysis of all material facts concerning any country, region, market, industry, investment or strategy.