There’s simply no way to predict the future. You can never look at a single company and say whether its stock price will go up or down over a day. As an income seeking, long term investor, the best you can do is take an educated guess and diversify. By holding a portfolio of dividend stocks you greatly reduce the risk of being losing value. Your mistakes are offset by the winners.
I’ve talked about finding dividend stocks and creating a rock-solid portfolio before. Looking for great dividend stocks, and adding them in the right proportion is easier said than done. Getting it right takes a bit of effort and a considerable amount of time.
Fortunately, there’s an easier way to gain exposure and diversification – Exchange Traded Funds (ETFs). ETFs are like a basket of stocks, created based on certain parameters, which trade like regular stocks on the market. You can pour money into a diversified ETF with high quality dividend stocks at the click of a button. Dividend etfs are a straightforward and quick way to gain exposure to income generating assets on the stock market.
All you have to do is pick the right one. Here’s what you need to consider:
The Ideal Dividend ETF
We’ve talked about dividend ETFs before. There are a ton of pros and a fair number of cons to investing through these securities. You get quick access and a diversified portfolio without having to do much research. Yet, you have to pick the right ETFs and take the time to understand how they work. Make sure you get the most bang for your investment buck.
Dividend ETFs are judged on a number of factors. You need to understand what the objective of the ETF is. What the stock selection methodology is, how many stocks are included, and what criteria does the fund management apply. You also need to make sure the dividend yield of the dividend ETF is higher than the risk free rate and the yield on the S&P 500 index. At the same time, you need to make sure the expense ratio is low enough. If the yield is too low and the expense ratio too high, your long-term performance will be eroded.
The following list of ten best dividend ETFs are based on their stock selection, benchmark, fees, dividend yield, and overall performance. Arranged in ascending order of dividend yield:
Starting with the lowest yield, the PowerShares Variable Portfolio invests in preferred shares. This dividend ETF offers a substantially higher yield while diversifying risk across a number of high quality corporations listed in America. The expense ratio is 0.50% which puts it inline with the average dividend ETF listed on the market.
Invesco’s dividend ETF is benchmarked to the Wells Fargo® Hybrid and Preferred Securities Financial Index (WHPSF Index). This is a juicy ETF that does something clever – it comprises preferred dividend stocks. Stocks that pay preferred dividends are usually unaccessible by retail investors. These are meant for corporations and institutional buyers who take massive stakes in businesses and get rewarded with higher fixed or floating dividend yields than common stocks. The dividend yield on this dividend etf is an astounding 5.24%. Nearly double the average yield on the S&P 500. A total of 93 securities make up the ETF and the expense ratio is 0.63%.
Another dividend ETf that contains preferred shares and income generating securities. Although the expense ratio is moderately high at 0.85%, the dividend yield more than makes up for it. Nearly 80% of the portfolio is invested in stocks that pay preference shares and junk bonds with a high yield and good prospects. Although the investments are international, more than half of the portfolio (55%) is comprised of American securities.
With over $18 billion in assets, this is a massive dividend etf. Again, the focus is on preference dividend stocks based in the US. However, the expense ratio is lower at 0.47% and the ETF often trades at a discount to the NAV. That means there could be an opportunity for dividend seeking investors to snap this ETF up on a bargain. Although, investors should be aware of the fact that this ETF has underperformed its benchmark – the S&P US Preferred Stock Index.
Invesco PowerShares Preferred Portfolio (5.63%)
Similar to the one on top of this list, with one key difference – it’s based on the The BofA Merrill Lynch Core Plus Fixed Rate Preferred Securities Index. This is a more thinly spread dividend ETF. The ETF comprises of 253 investment grade securities and the expense ratio is lower at 0.5%. Unfortunately, the ETF has not managed to outperform the S&P US Preferred Stock Index or the selected benchmark since 2008.
O’Shares FTSE Europe Quality Dividend ETF (5.68%)
As the name suggests, this is a dividend ETF for income seeking investors who want to diversify into European securities. It’s a mix of large cap and mid cap stocks from across Europe, selected on the basis of quality dividends and low volatility. 24% of the portfolio is invested in consumer good companies. The four largest holdings are Nestle (5.04%), Roche Hldgs (4.73%), Novartis (4.21%) and British American Tobacco (4.01%). But the expense ratio is a bit higher than average at 0.58%.
Global X SuperDividend ETF (6.73%)
This dividend ETF diversifies across the world to get the best yield possible. There are over 100 securities as part of the portfolio and nearly half is invested in the US. 45% of the portfolio is made of US stocks, while Singapore, Japan, New Zealand, and China make up the rest. Nearly one-third (30%) of the overall portfolio is invested in Real Estate Investment Trusts, so you know the yield is relatively stable.
UBS E-TRACS Linked to the Wells Fargo Business Development Company Index (7.85%)
This UBS exchange traded note acts like an index tracker. The index being Wells Fargo’s business development companies one. It’s a bit more complicated than a regular dividend ETF and the expense ratio is a bit higher than average at 0.85%, so this may not be the best choice for every retail investor. But if you’re willing to dig into the details and figure out how this ETN can fit your overall portfolio, the nearly 8% yield may be justified. N
YieldShares High Income ETF (7.93%)
With just 30 holdings, this dividend ETF is lot more concentrated than your average portfolio. The best part of the ETF could be the fact that it pays out a dividend every month. The worst part could be the 1.72% expense ratio which is higher than all the other dividend ETFs on this list. Also, the portfolio is 75% bonds and only 25% stocks, so a bit more difficult to value appropriately.
Invesco PowerShares KBW High Dividend Yield Financial Portfolio (8.93%)
Companies that tend to pay a higher dividend are usually the ones that have their finances in order. We’ve discussed how a healthy balance sheet and sustainable profits lead to better dividends. So, what better way to get dividends than to invest in high-yielding financial companies? This Invesco Dividend ETF invests heavily in small cap financial firms with a high and stable dividend. 9% in dividend yields is great, however the expense ratio is also just as high at 2.99%. Overall, not worth the risk.
This list of dividend ETFs brings up some interesting trends. A lot of the highest yielding ETFs focus on preferred shares. This is for obvious reasons. Usually, companies and institutions pick high-quality companies stocks for these ETFs. Some focus on real estate and leveraged securities (which I wouldn’t recommend).
However, the highest yielding dividend ETFs come with surprisingly high expense ratios. If the yield and expense ratio are both in single digit percentage points, you need to carefully consider what you’re investing in. While these ETFs diversify risk, they also tend to struggle with performance. Pay attention to the total return on any ETF you consider and make sure it beats the market over time.
Picking the right dividend ETF requires a little more research. However, if you pick a high quality ETF from this list, you can easily boost your portfolio’s overall yield without taking too much risk.