3 Dividend ETFs Built for Stability in a Volatile Market
Key Points
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Interested in ProShares S&P 500 Aristocrats ETF? Here are five stocks we like better.
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Dividend stocks have broadly delivered stable, and in some cases market-beating, returns this year amid ongoing concerns about inflation and interest rates.
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Three ETFs—NOBL, SDY, and DGRO—offer distinct approaches to dividend investing, varying in portfolio size, yield, expense ratio, and weighting methodology.
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DGRO stands out for its low 0.08% expense ratio and broad 396-stock basket, while NOBL offers the highest dividend yield at 3.7% among the three funds.
Despite persistent concerns about inflation, interest rates, a potential AI bubble, and more, dividend stocks as a group have generally done what they do best this year: remain fairly stable as a defensive play. In fact, because performance strength has expanded beyond mega-cap tech stocks to also include industrials, financials, and more, a broader array of dividend-paying names have been able to log market-beating returns on top of their regular distributions.
Investors should not necessarily expect that dividend stock outperformance will continue—though there are some notable distribution increases to keep an eye on—but while momentum lasts, it may be a good time to consider building up positions in exchange-traded funds (ETFs) that cover the space.
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Balanced Exposure to Essential Dividend Aristocrats
Tracking the well-known S&P 500 Dividend Aristocrats Index, comprised of leading companies in the S&P that have a consistent, multi-decade history of increased distributions, the ProShares S&P 500 Aristocrats ETF (BATS: NOBL) is a broad entry point to this corner of the market. Because of its equal-weighting approach and 30% cap on any individual sector allocation, NOBL ensures that investors receive a highly diversified basket of 73 top dividend-paying stocks.
While many investors look to dividend ETFs as buy-and-hold plays, it’s helpful to know that liquidity is unlikely to be a major concern for NOBL investors when they do need to adjust their positions. The fund has close to $12 billion in assets under management (AUM) and a one-month average trading volume of 1.4 million shares. This comes despite the fund’s somewhat elevated expense ratio of 0.35%, which is higher than some competitors in the space.
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One could make an argument that companies that have steadily increased their payouts over at least 25 years are among the strongest, most stable dividend stocks available.
In terms of year-to-date (YTD) performance, these companies have also done a good job keeping pace with the market. However, with YTD returns of 8.8%, they are not outperforming for the time being. Still, with a dividend yield of 3.7%, investors may not mind.
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A Broader Basket With a Different Returns/Dividend Yield Profile
The SPDR S&P Dividend ETF (NYSEARCA: SDY) takes a somewhat different approach from NOBL in that it targets companies from the broader S&P that have not only increased dividends for at least 20 years, but that also have the highest dividend yields. Stocks in this basket typically have both capital growth and dividend income features.
The result is a basket of close to 190 names that leans toward industrials, consumer staples, and utilities stocks. SDY is not equally weighted like NOBL, but the largest positions still represent well under 3% of the total portfolio each. Based on AUM and trading volume, SDY may appeal more to investors seeking a long-term position. The fund has about $21.4 billion in assets, significantly greater than NOBL, but a much lower trading volume at only about 260,000 shares per day on average. The expense ratios for these two funds are exactly the same at 0.35%, making a direct comparison more easily possible.
SDY takes the lead when it comes to returns, however, with 10% growth YTD. At the same time, its dividend yield is slightly lower at 2.4%. Investors may see this as a trade-off for somewhat more robust returns.
A Dividend Growth Focus and the Deepest Portfolio Yet
A third dividend ETF option to consider is the iShares Core Dividend Growth ETF (NYSEARCA: DGRO), which may help to protect investors from dividend yield traps—companies with unsustainably high dividend yields that either cut distributions or collapse. It does this by focusing specifically on firms that have grown their dividends over time and includes other factors, such as payout ratio, when constructing a basket.
DGRO is not a particularly flashy fund, but its solid AUM base of $41 billion and healthy trading volumes indicate its popularity among investors seeking a low-cost dividend ETF.
Given its expense ratio of 0.08%, it is significantly cheaper than the other options on this list. It also has a much broader basket of 396 stocks, although because the largest holdings represent more than 3% each many of the smallest positions are miniscule.
When it comes to performance, DGRO is in between the other funds on this list with 10% returns YTD, though its dividend yield of 1.9% is lower.
For the more modest cost and the added diversification, investors may be willing to make this concession.
The article “3 Dividend ETFs Built for Stability in a Volatile Market” was originally published by MarketBeat.