Updated March 30, 2021 by Bob Ciura
We believe that dividend growth investors can achieve superior returns over the long term by investing in high quality dividend stocks like the Dividend Aristocrats. The Dividend Aristocrats are a group of 65 stocks in the S&P 500 Index that have each increased their dividends for at least 25 years or more.
Investors can buy high quality dividend growth stocks like the Dividend Aristocrats individually or through exchange-traded funds. ETFs have become much more popular over the past five years, especially when compared to more expensive mutual funds.
With that in mind, we’ve created a downloadable Excel list of dividend ETFs that we believe are most attractive to high-income investors. We also took into account the dividend yield, expense ratio, and average value for money of the ETF (if available).
You can download your full list of 20+ dividend ETFs by clicking the link below:
Dividend ETFs could be a worthwhile addition to a dividend growth investor’s portfolio, especially for investors looking for diversification and simplicity.
This article explains why high-income investors who don’t want to buy individual stocks should consider dividend ETFs. We’ll also discuss our top picks among the top dividend ETFs.
First, investors should learn the basics of exchange-traded funds. ETFs are similar to mutual funds in that they allow investors to buy shares in a basket of shares at the same time. In this way, both ETFs and mutual funds offer instant diversification benefits. ETFs typically track an index, but they can pursue a variety of investment strategies.
ETFs come in all shapes and sizes – including small caps, mid caps, and large caps. Growth ETFs, Value ETFs, or Income ETFs; and ETFs that invest in specific market sectors or industries. Some ETFs invest in US companies while other ETFs invest in international markets. There are also ETFs in different asset classes, including stock ETFs, bond ETFs, currency ETFs, or ETFs that invest in Master Limited Partnerships (MLPs) or Real Estate Investment Trusts (REITs).
Certain ETFs also use leverage to increase returns. However, investors should understand that leverage can backfire. There are also inverse ETFs that allow investors to take an opposite position on a particular index or sector.
The largest ETF in terms of assets under management is the SPDR S&P 500 ETF (SPY), which had an AUM of just over $ 311 billion as of Jan 29, 2020. ETFs like SPY offer investors instant diversification benefits that some investors prefer to invest in individual stocks. Buying individual stocks requires investors to carefully consider the particular company’s business model, growth potential and stock valuation.
Before the ETF boom over the past decade, investors who wanted to hold baskets of stocks were buying mutual funds. However, many mutual funds had exorbitant fees associated with the investment, such as: B. Front-end fees, and high annual fees of 1% or more. These fees are of no use to the investor and can significantly affect returns over the years. ETFs became very popular as many had significantly lower fees than comparable mutual funds.
SPY has an annual expense ratio of only 0.095% which can help investors save big money over time. Consider the following example of an investor who buys $ 10,000 in SPY and has an average return of 8% per year for 30 years. Including the 0.095% annual fee, this investor would have a portfolio value of just over $ 98,000.
Now suppose the investor instead invested the original $ 10,000 in a comparable mutual fund with the same holdings, but the mutual fund calculated an annual expense ratio of 1%. In 30 years, that investor would have a portfolio worth just over $ 76,000 after annual fees are factored in – roughly $ 22,000 less than if the investor had bought SPY instead.
In addition to lower fees, ETFs also give investors greater liquidity. ETFs, like stocks, trade all day. This is cheap compared to mutual funds, which are only valued once a day after the market closes.
This explains the ETF boom over the past 10 years, which is unlikely to slow down anytime soon. Asset managers have been fighting some sort of price war in recent years, and have been forced to cut fees in order to retain clients. SPY is arguably the best way to invest in the S&P 500 through ETFs. For high-income investors looking for a higher return, there are also dividend-oriented ETFs that are very attractive.
The Dividend Aristocrat ETF
There are many good reasons for high income investors to consider the Dividend Aristocrats. Investing is risky, of course, but the Dividend Aristocrats have long had a track record of consistently increasing dividends. They have also achieved higher returns than the market as a whole over the past decade.
Over the past 10 years, the Dividend Aristocrats’ performance has matched the broader S&P 500 index, with an annualized return of 13.43% through February. Given that the Dividend Aristocrats had lower risk (as measured by the standard deviation), the result is that the Dividend Aristocrats had higher risk-adjusted returns than the broader market index.
We believe this is because Dividend Aristocrats largely have long-term competitive advantage, leadership positions in their specific industries, and long-term growth potential. These characteristics allow them to keep increasing their dividends every year without a break.
Many dividend aristocrats have been raising their dividends for 50 years or more. The list of Dividend Aristocrats is diversified by market sector, as can be seen in the following picture:
Source: NOBL Fact Sheet
We encourage investors to buy individual Dividend Aristocrats with expected returns of 10% or more per year over the next five years. We provide full reports on the Sure Analysis Research Database detailing our expected returns for hundreds of stocks, including the Dividend Aristocrats.
For many investors, however, ETFs could be a suitable alternative. If an investor would rather own all Dividend Aristocrats at once, the ProShares S&P 500 Dividend Aristocrats ETF (NOBL) is the best choice.
NOBL is the largest ETF specifically tracking dividend aristocrats. NOBL has approximately $ 7.06 billion in net worth with a Morningstar rating of four stars. As mentioned earlier, the low cost ratios are one of the big selling points for ETFs. In fact, NOBL has a very reasonable annual expense ratio of 0.35%.
Unsurprisingly, NOBL has a diversified list of holdings. As of March 29, it owned all 65 Dividend Aristocrats. NOBL appears to be an attractive ETF for investors looking to buy an ETF geared towards dividend growth.
An ETF for even higher incomes
One potential downside to NOBL is that the fund’s dividend yield is 2.3%; While this beats the S&P 500’s average dividend yield of ~ 1.5%, investors will find many individual Dividend Aristocrats with significantly higher yields.
For example, AT&T (T), AbbVie (ABBV), and Exxon Mobil (XOM) are all Dividend Aristocrats and all have current dividend yields above 4.5% – more than double the yield on the NOBL ETF. Investors willing to take the risks associated with buying individual stocks can achieve much higher portfolio returns by focusing on the Dividend Aristocrats with the highest returns.
Investors looking for a higher yield than NOBL could consider the SPDR Portfolio S&P 500 High Dividend ETF (SPYD). This ETF has a much higher yield of 4.8% and a very low annual expense ratio of 0.07%. SPYD manages just over $ 3 billion in assets. The ETF is diversified, but the real estate, consumer staples and utilities sectors make up a large proportion of the holdings.
The goal of the fund is to hold ~ 80 of the highest yielding stocks in the S&P 500. The average market capitalization of its stock holdings is $ 47.3 billion with an average value for money of 15.2. This ETF is more attractive than NOBL to value and income investors because of its higher yield and lower average P / E ratio.
However, SPYD’s holdings aren’t quite the blue-chip dividend stocks that make up NOBL’s holdings. Most of the stocks held by SPYD don’t have the same track record of annual dividend increases as the Dividend Aristocrats. The five largest SPYD holdings are, for example, Hewlett Packard Enterprise (HPE), Hanesbrands (HBI), ConocoPhillips (COP), Seagate Technology (STX) and Altria Group (MO).
These are all solid income options with returns above 3%, but only Altria has a long history of annual dividend increases. Hence, the general takeaway for SPYD is that investors can get a higher dividend yield, but lose some of the business quality in return.
We’re big advocates of selectively buying high quality dividend growth stocks like the Dividend Aristocrats and Dividend Kings (who have been raising dividends for over 50 years), especially when they’re undervalued. However, buying individual stocks requires a thorough study of the company’s specific business model, growth prospects, and various company-specific risks.
For investors looking to make buying dividend growth stocks easier, ETFs could be an attractive option. Investors can get immediate diversification benefits by purchasing an ETF. The downside, however, is that ETFs have annual fees that reduce shareholder returns. Many ETFs have lower returns than can be obtained by investing in individual stocks.
Investors who choose the ETF route may find NOBL a great way to invest in all Dividend Aristocrats at the same time, while SPYD is an attractive choice for high-income investors looking for high returns.
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