Exchange-traded funds (ETFs) designed to generate dividend income have become more popular in this market cycle as investors seek investments that can offset the losses in their portfolios. Dividend-focused ETFs can provide income if you decide to take the distributions, but they can also increase the total return of the ETF when reinvested.
An added benefit of income-oriented ETFs right now is that they typically generate higher returns than other types of equity investments, especially since they invest in large, stable companies that can withstand volatility better than most. These two ETFs share that dual benefit of generating solid dividend income and producing returns that are in line with the market.
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iShares Core High Dividend ETF
The iShares Core High Dividend ETF (NYSEMKT: HDV) tracks an index composed of high yielding dividend stocks – the Morningstar Dividend Yield Focus Index. It includes stocks that generate high returns while also meeting corporate quality and financial health screens. The portfolio consists of 75 stocks, most of them big names.
The three largest companies are: ExxonMobil (7.1%), Johnson & Johnson (6.7%) and Verizon (6.0%). About 23.6% of the portfolio is in healthcare stocks, 18.4% in energy and 16.6% in consumer staples.
The ETF has a 12-month trailing yield of 3.12% and recently paid a $0.57 payout in June. Over the past 12 months, it has paid $3.15 per share in dividends. In terms of returns, it’s essentially flat so far, up about 5% over the last year, outperforming the S&P 500 in both cases. And June was a rough month, pushing the fund’s performance down.
Through May 31, it had a 5-year 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 consists of stocks that meet two screens above the FTSE Developed Large-Cap Index, which includes 1,000 stocks.
First, the companies with the highest free cash yields are screened. Free cash flow is the money a company has after covering its operating costs and capital expenditures. The higher the free cash flow, the better a company is at paying a consistent dividend. It then screens from those companies to those with the highest dividend yields.
The index, and thus the ETF, is made up of the 100 stocks that best fit these screens, weighted by their dividend yield. Currently, the three largest 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 delinquency yield of 4.38% and paid out a $0.29 payout in June. Over the past 12 months, it has paid $1.45 per share in dividends. The share price is down about 2% so far and has been about flat for the past 12 months. But as of May 31, it had an annualized return of 7.7% over five years. 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 companies with plenty of cash, they should be able to navigate any turbulent seas ahead.
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Dave Kovaleski has no position in any of the listed stocks. The Motley Fool recommends GlaxoSmithKline, Johnson & Johnson, and Verizon Communications. The Motley Fool has a disclosure policy.