Ten-year Treasury yields are moving higher as of late, residing at 1.575% as of Nov. 1, but that’s low by historical standards and presents challenges to income investors. The S&P 500 isn’t much better. It’s actually worse in yield terms at just 1.30%. So it’s no wonder investors are craving high dividend exchange traded funds again.
In simple terms, many high dividend ETFs follow yield-weighting methodologies, meaning components in those funds are weighted according to dividend yield or yield is combined with other metrics. It’s a strategy many investors like and one that often works well when interest rates are low as is the case today. That’s a reminder that high dividend stocks usually hail from interest rate-sensitive sectors, such as real estate and utilities and can be crimped when rates rise.
Combine the rate risk with the fact some high dividend companies are under financial duress and could be dividend offenders in the future – the rampant dividend cutting seen in 2020 is a case study in that scenario – and it’s a wonder why investors embrace high dividend ETFs.
This year, it’s understandable. Dividends are growing again and income investors’ hands are being forced by low interest rates. With that in mind, here are some interesting, potentially safer options among high dividend ETFs to consider.
ALPS Sector Dividend Dogs ETF (SDOG)
The ALPS Sector Dividend Dogs ETF is a high dividend ETF built for the current market environment because it employs an equal-weight strategy to its sector allocations, meaning it’s significantly overweight energy stocks relative to traditional broad market indexes. That’s a plus considering that energy is the best-performing sector in the S&P 500 this year.
SDOG yields north of 3% and is up 18% year-to-date – an impressive showing when factoring in that the ETF has no exposure to real estate stocks. Real estate is the second-best sector this year behind energy. Enhancing the allure of SDOG relative to other high dividend funds is that there’s more of an element of quality here than meets the eye, indicating its member firms’ dividends are sustainable.
“The S-Network Sector Dividend Dogs Index (SDOGX) offers attractive income from quality companies, with investment-grade companies representing over 86% of the index by weighting,” says Alerian analyst Stacey Morris. “Multiple screens for dividend durability, including evaluating cash flows, EBITDA, and debt-to-equity ratios, help ensure reliable income from the durable dividend indexes. While current yields are below the 5-year average, they are well above the S&P 500’s current 1.41% yield.”
Invesco S&P 500 High Dividend Low Volatility ETF (SPHD)
The Invesco S&P 500 High Dividend Low Volatility ETF is a best of both worlds proposition of income-hungry for conservative income investors. SPHD has a tidy 12-month distribution rate of 3.72% and it’s designed to be a lower volatility dividend solution.
The fund tracks the S&P 500 Low Volatility High Dividend Index, which is a collection of the 50 S&P 500 members with the highest dividend yields and lowest volatility. To be precise, SPHD holds 51 stocks.
Low volatility ETFs are intended to be sector agnostic, but the low volatility objective often leads these funds, including SPHD, to familiar sectors. That’s doubly true when adding the dividend overlay. To that end, SPHD allocates 38% of its weight to utilities and consumer staples stocks.
Investors looking for growth fare might want to steer clear of this fund as over 80% of its holdings are classified as value stocks and none sport the growth label.
WisdomTree Emerging Markets High Dividend Fund (DEM)
While home country bias runs deep among American investors, those seeking income should realize there are some credible dividend destinations in developing economies. Enter the WisdomTree Emerging Markets High Dividend Fund – one of the original ETFs in this category.
DEM follows the WisdomTree Emerging Markets High Dividend Index, which takes the top 30% of the members of the WisdomTree Emerging Markets Dividend Index based on dividend and then weights those stocks on the basis of cash dividends paid.
DEM’s 4.53% dividend yield is an obvious point of attraction, but there’s more to this fund’s story. It has significant commodities and value exposure. For example, Brazil, Russia and South Africa – all commodities-rich countries – combine for about 31.6% of the fund’s weight. Those exposures are making a difference as DEM is up nearly 6% year-to-date while the MSCI Emerging Markets Index is in the red.
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