Picking A High Dividend ETF
Patrick is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Bond yields remain weak, and the potential price action when yields do recover could prove volatile, so a lot of income seeking investors have been turning to stock dividends. Of course, picking a stock is nothing like picking a bond, so lots of exchange traded fund providers have entered the dividend space to "help"...
Above I have attempted to shoehorn my "Good Bad Ugly" method onto a number of high yield ETFs. Yield is my measure of merit, and expense ratio my measure of cheapness. The "good" funds strike a balance between the two.
- Vanguard High Dividend Yield (NYSEMKT: VYM) seeks to follow the FTSE High Dividend Yield Index, which ranks U.S. stocks by dividend yield, excluding REITS to avoid tax complications. It currently includes inputs from more than 400 companies.
- SPDR S&P Dividend (NYSEMKT: SDY) seeks to track the performance of the S&P High Yield Dividend Aristocrats Index, which picks the 60 highest yielding stocks from a group of 1500 U.S. companies.
- iShares Dow Jones International Select Dividend (NYSEMKT: IDV) attempts to follow the Dow Jones EPAC Select Dividend Index, which picks (apparently with as much magic as method) 100 dividend paying companies from any developed country but the United States.
Skipping over the "bad" (the mediocre) I move on to the "ugly" (the bad):
- Vanguard Dividend Appreciation (NYSEMKT: VIG) (the fund that first attracted my attention to this subject, via the Motley Fool's CAPS community's personalized stock ideas) attempts to follow the Dividend Achievers Select Index, which includes U.S. based and traded companies that have consistently grown their dividend. It currently tracks something under 200 companies.
- WisdomTree Emerging Mkts Small Cap Div (NYSEMKT: DGS) tracks the Wisdom Tree Emerging Markets Small Cap Dividend Index, which represents companies in the bottom 10%, capitalization style, of the Wisdom Tree Emerging Markets Dividend Index. Even this small slice of an obscure pie represents some 700 companies.
- iShares High Dividend Equity seeks to follow the Morningstar Dividend Yield Focus Index, which includes 75 high yielding, high quality U.S. companies.
Ok, so my method isn't a good predictor of past returns, in that my "good" funds have a loser for last year, and my "bad" funds has a winner. But the point is the future, and the method is based on Joel Greenblatt's, which has certainly worked for him, and my prior adaptations worked okay for me, and landed me (via my CAPs performance) this writing gig. So, assuming I have my "good" and "bad" correct, what other comparisons and contrasts can we make?
With Vanguard and iShares in both lists, I don't think you can rely on a fund family (although my naturally cheap nature is drawn to Vanguard). And I've already noted that it's bad form to chase past returns (except, perhaps, in the negative sense, as a Foolish value player and an intrinsically contrary person).
I half-expected to see some correlation between the number of companies in a fund or index and its ranking or performance, but no. The number of companies range from 60 to 700, with funds near the extremes in all of my categories. As I typically invest in about 20 stocks at a time, it's clear that any fund is more diverse than me, or I suspect most individual investors.
The one clear trend is that all last year's losers were international funds. But what do we conclude from this? An interantional shopping spree, or a reason to stay home?
The bottom line: ETFs are tough. Perhaps not as tough as stocks, but tough. You have to do your homework if you want to sleep at night. I'm betting my pride (and perhaps my money) on Vanguard's High Dividend Yield (VYM), the cheapest with a tasty yield, and iShare's Dow Jones International Select Dividend Fund, providing diversification by excluding the US, and perhaps providing a nice contrarian value play.
Am I right? Follow me on CAPS to find out.
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