Dividend ETFs, How to Decide Which is Best for You.

By Herbert Blank

Dividend ETFs have seen major inflows in recent years.  At a time when most fixed income ETFs have historically low yields, that interest is easy to understand.  There are more than 100 US-listed ETFs categorized by Morningstar, ETF.com, ETF Stream and others as Dividend ETFs.  Many of these use very different methodologies to satisfy disparate objectives resulting in performance and portfolio holdings files that can look quite different.  Let’s take a deeper dive into 4 of them: Dividend ETFs: DVY; NOBL; SCHD; SPYD.

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DVY is the iShares Select Dividend ETF. It seeks to track the investment results of the Dow Jones US Select Dividend Index which is composed of relatively high dividend paying U.S. equities.  As with SPYD, the weighting scheme for DVY emphasizes the highest yielding stocks at time of reconstitution. Four major differences: The starting universe is broader than the S&P 500; REITs are excluded; stocks that do not pass both of two dividend coverage and dividend directional screens are also excluded; DVY holds 100 stocks at reconstitution, not 80.

NOBL is the ProShares S&P 500 Dividend Aristocrats ETF.  Its selection universe is the S&P 500 Dividend Aristocrats Index — companies within the S&P 500 that have raised their dividends for at least 25 consecutive years.  Its focus tends to result in consistent dividend growth, not maximizing dividend yield.  The number of constituents in NOBL varies with the number of stocks in the S&P 500 that pass that hurdle. Currently, NOBL has 65 constituents.

SPYD is the SPDR Portfolio S&P 500 High Dividend ETF from State Street Global Advisors.  It seeks to provide a high level of dividend income through replicating the S&P 500 High Dividend Yield Index. Despite having the 500 in its names, the ETF and the Index contain the top 80 highest dividend-yielding companies within the S&P 500 Index at the time the index changes its holdings, known as reconstitution.  

SCHD is the Schwab US Dividend ETF. It seeks to track the investment results of the Dow Jones U.S. Dividend 100 Index, a modified cap-weighted index that is designed to measure the performance of 100 high-dividend-yielding stocks in the U.S. with a record of consistently paying dividends, selected for fundamental strength relative to their peers, based on financial ratios at time of reconstitution. 

Research Reports on each of these ETF’s are available here: http://www.valuengine.com/rep/mresearch_report

These descriptions seem very similar, but the following analysis highlights key differences that result from the differences in the details of the methodologies. 

Ticker Dividend Yield Beta 1-Yr Return 5-Yr Avg Return Volatility Sharpe Ratio VE Rating
DVY 3.66% 0.98 -8.97% 3.98% 16.69% 0.24 1
NOBL 2.14% 0.92 5.68% 9.19% 14.85% 0.62 3
SCHD 3.09% 0.96 13.78% 10.18% 15.31% 0.66 2
SPYD 4.95% 1.17 -16.52% 1.58% 21.03% 0.08 1

SPYD, the SPDR Portfolio S&P 500 High Dividend ETF supplies the highest dividend yield of the 4 ETFs in the table.  This follows directly from its methodology which is singularly focused on the highest yielding stocks in the S&P 500 Index. The other three all have screens for consistent dividend growth and/or dividend coverage and/or fundamental strength.  For conservative investors, the trade-offs for maximizing yield are considerable.  SPYD is the most volatile by far.  It also has the lowest returns over the past year and the past 5 years.  It also gets VEs lowest rating of one V for current investment.  

DVY, the iShares Select Dividend ETF has the second best dividend yield at 3.7% but more than 25% less than that of SPYD.  It is much less volatile than SPYD too. The other two ETFs are both less volatile than DVY but the differences are rather modest in comparison.  DVY had a negative return in 2020 but less than half as large a drawdown as suffered by SPYD and its 5-year average return of about 4% is more than double DVY’s meager result during the same span.  However, the 1- and 5-year return numbers are both much higher for NOBL and SCHD.  DVY also gets VE’s lowest rating of one V for current investment.  

SCHD, the Schwab US Dividend ETF, provides a much more balanced trade-off between dividend yield and historical price performance.  The yield is a healthy 3.1% as compared with just 2,1% for NOBL.  Yet for the past 1 year and 5 years it has edged NOBL in price performance while NOBL was slightly less volatile.  In fact, last year SCHD’s price gain of 13.8% was more than double NOBL’s gain of 5.7%.  The fundamental selection screens used by Schwab paid handsome dividends in 2020.  If may have resulted in a few overvalued holdings for the year-ahead however, SCHD gets 2 Vs from ValuEngine for the year ahead which while better than one is still below average. Timing is everything in the stock market.  Nevertheless, if above average yield and solid historical price performance are both important to you, take a close look at SCHD.

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Although Dividend is in the ETFs name, I consider NOBL, the ProShares S&P 500 Dividend Aristocrats Index more of a high-quality blue-chip ETF than a high-yield ETF.  In fact, its dividend yield is slightly below the 2.2% of its parent index, the S&P 500.  NOBL is a very appropriate holding for conservative investors.  It has a low Beta and low Price volatility and relatively consistent price performance.  NOBL gets 3 Vs from ValuEngine, a solid if middle-of-the-spectrum rating.  

So even though the names of all four ETFs emphasize dividends, an investor should make it his or her business to dig beneath the surface.  The ValuEngine ETF reports assist in doing just that and facilitates comparisons.  In short, always read the fund fact sheets and summary prospectus documents to understand what you are actually buying.  Next, to analyze key differences, come to ValuEngine to quantify the strengths and weaknesses of each ETF under consideration.  

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Herb Blank

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