Exchange-traded funds (ETFs) designed to generate dividend income have become more popular in this market cycle as investors seek investments that can offset losses in their portfolios. Dividend-focused ETFs can provide income if you decide to take the distributions, but they can also increase the ETF’s total return when they are reinvested.
An added advantage of income-oriented ETFs today is that they generally generate higher returns than other types of equity investments, primarily because they invest in large, stable companies that are able to withstand to volatility better than most. These two ETFs share the dual advantage of generating strong dividend income and producing above-market returns.
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iShares Core High Dividend ETF
The iShares Core High Dividend ETF (NYSEMKT:HDV) tracks a composite index of high yielding dividend stocks – the Morningstar Dividend Yield Focus Index. It contains stocks that generate high returns while respecting the criteria of quality and financial health of the company. The portfolio consists of 75 stocks, most of which are large-cap value stocks.
The three largest farms are ExxonMobil (7.1%), Johnson & Johnson (6.7%) and Verizon (6.0%). About 23.6% of the portfolio is made up of healthcare stocks, while 18.4% is in energy and 16.6% in consumer staples.
The ETF has a 12-month yield of 3.12% and recently paid a distribution of $0.57 in June. Over the past 12 months, it has paid $3.15 per share in dividends. As for returns, they have been essentially flat since the start of the year and have increased by about 5% over the past year, surpassing the S&P500 in both cases. And June was a difficult month, causing the fund’s performance to fall.
Through May 31, it had a five-year annualized total return of 9.2% and a 10-year annualized return of 10.6%. It also has a low expense ratio of 0.08%.
ETF Pacer Global Cash Cows Dividend
The ETF Pacer Global Cash Cows Dividend (NYSEMKT: GCOW) tracks an index called the Pacer Global Cash Cows High Dividend 100 Index. The index is made up of stocks that meet two criteria spanning the FTSE Developed Large-Cap Index, which comprises 1,000 stocks.
First, it selects companies with the highest free cash yields. Free movement of capital is the cash a company has after covering its operating expenses and capital expenditures. The higher its free cash flow, the more a company has to pay a constant dividend. Then, among these companies, it selects those with the highest dividend yields.
The index, and therefore the ETF, is made up of the 100 stocks that best meet these criteria, weighted by their dividend yields. Currently, the top three holdings in the portfolio are AbbVie (2.3%), GlaxoSmithKline (2.2%) and AT&T (2.2%). The largest sector is materials at 19.5%, followed by healthcare at 17.6% and energy at 17.5%.
It has a 12-month yield of 4.38% and paid a distribution of $0.29 in June. Over the past 12 months, it has paid $1.45 per share in dividends. The stock price is down about 2% year-to-date and has fallen about the same level for the past 12 months. But as of May 31, it had a five-year annualized return of 7.7%. The expense ratio is slightly higher than the iShares ETF at 0.60%.
These are two of the best performing broad market dividend ETFs on the market. Given that they focus on stable businesses with an abundance of cash, they should be able to navigate any rough seas.
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