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 choose to accept distributions, but they can also boost the ETF’s total return when they are reinvested.
An added benefit of income-focused ETFs right now is that they typically generate higher returns than other types of equity investments, primarily because they invest in large, stable companies that can weather volatility better than most. These two ETFs share that dual benefit of generating strong dividend income and producing market-beating returns.
iShares Core High Dividend ETF
the iShares Core High Dividend ETF (NYSEMKT: HDV) tracks an index comprising high-yielding dividend stocks: the Morningstar Dividend Yield Focus Index. It contains stocks that generate high returns and, at the same time, meet the criteria of quality and financial health of the company. The portfolio consists of 75 stocks, most of them large-cap security names.
The three largest holdings are exxonmobile (7.1%), Johnson and Johnson (6.7%), and Verizon (6.0%). Some 23.6% of the portfolio is in healthcare stocks, while 18.4% is in energy and 16.6% in consumer staples.
The ETF has a trailing 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. Yield-wise, it’s essentially flat year-to-date and is up about 5% over the last year, outperforming S&P 500 in both cases. And June was a difficult month, which reduced the fund’s performance.
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%.
Pacer Global Cash Cows Dividend ETF
the Pacer Global Cash Cows Dividend ETF (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 screens that overlay the FTSE-developed Large Cap Index, which includes 1,000 stocks.
First, look for the companies with the highest returns on free cash. Free cash flow It is the cash a company has after covering its operating expenses and capital expenses. The higher your free cash flow, the better for a company to pay a steady dividend. Then, from those companies, select the ones with the highest dividend yields.
The index, and thus the ETF, consists of the 100 stocks that best meet these screens, weighted by their dividend yields. Currently, the three largest holdings in the portfolio are AbbVie (23%), GlaxoSmithKline (2.2%), and AT&T (2.2%). The largest sector is materials at 19.5%, followed by health care at 17.6% and energy at 17.5%.
It has a trailing 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 down about as much over 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 out there. Given their focus on stable, cash-rich businesses, they should be able to navigate whatever rough seas lie ahead.
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