Three High-Return Dividend Exchange-Traded Funds to Invest in for Passive Income Generation
Three High-Return Dividend Exchange-Traded Funds to Invest in for Passive Income Generation
Investors of all sorts can derive benefits from dividend stocks' potency, despite dividends typically being sought after by those nearing retirement or in retirement. These regular payouts considerably enhance your long-term returns, irrespective of your stage in your investing journey.
This becomes particularly advantageous during market downturns. During these periods, recurring dividend payouts cushion a portfolio's returns and offer investors the opportunity to reinvest while stocks trade at lower prices.
Given today's market, which might appear costly, these attributes could prove particularly advantageous, should Wall Street encounter volatility or a substantial pullback in the upcoming year. Consequently, high-dividend exchange-traded funds (ETFs) could prove to be excellent choices.
WisdomTree U.S. High Dividend Fund
If you're intrigued by high and growing dividends, coupled with the security of large-cap global stocks, the WisdomTree U.S. High Dividend Fund (DHS -0.40%) might appeal to you.
This ETF currently provides a yield of 3.5%, which is commendable compared to the 1.2% typical yield of the S&P 500 index. Moreover, the WisdomTree U.S. High Dividend Fund focuses on stable, large stocks that generate substantial cash flows. Its top current holdings include oil and natural gas giant ExxonMobil, tobacco giant Altria Group, and pharmaceutical leader AbbieVie.
WisdomTree adopts a unique strategy for selecting and weighing the stocks in this ETF. First, its portfolio is highly diversified, with 388 stocks at present. A company must have paid dividends over the past 12 months and have a market capitalization of more than $100 million to be included.
Second, rather than basing positions on market capitalization or dividend yield, it weights them based on the overall amount of dividends they distribute. Larger companies typically distribute more, but a high market capitalization doesn't necessarily equate to higher dividends. Therefore, this approach, which could be termed the "market cap of the dividend," is an intelligent way to balance size and strength with dividend yield.
WisdomTree then ranks the selected securities based on a "risk composite" metric, which factors in a "quality" factor based on return on equity, and a "momentum" factor that rewards strong stock performance over the previous six and 12 months. The goal is to exclude risky stocks from the ETF by omitting those that score poorly on this risk composite. Surprisingly, the ETF won't hold the top 5% of stocks with the highest dividend yields for the same reason - a very high dividend might indicate a company in trouble, and such a company might cut its payout in the near future. Consequently, avoiding the very highest-yielding stocks is yet another method to manage risk, though it may mean a slight sacrifice in dividend yield.
The Invesco S&P SmallCap High-Dividend Low-Volatility ETF
Seeking a higher payout with potentially higher risk? The Invesco S&P SmallCap High Dividend Low Volatility ETF (XSHD -0.96%) might be suitable for you.
This ETF boasts a very enticing 6.9% yield. However, it's crucial to remember that its portfolio consists of small-cap stocks, which are generally perceived as more risky investments than large-cap stocks. Moreover, the ETF tracks the S&P SmallCap 600 Low Volatility High Dividend index, which initially selects 90 stocks with the highest dividends from the S&P 600 small-cap index. Stocks with extremely high dividends may face underlying business risks which could lead to payout cuts.
Consequently, combining small caps with high yields is risky. However, this index then employs additional filtering steps to manage these risks. It first clusters those 90 stocks to 60 by eliminating the 30 with the highest volatility as measured by a stock's beta. A stock with a beta below 1 exhibits lesser volatility than its index on average, while a beta above 1 indicates a more volatile stock.
While volatility isn't identical to the concept of risk, many investors use beta as a tool to quantify risk. Therefore, trimming the list of the 90 highest-yielding small caps to the 60 least beta ones within this universe aims to offset some of the risk intrinsic to investing in high-yield small caps.
Lastly, the Invesco S&P SmallCap High Dividend Low Volatility ETF likewise restricts the number of stocks in its portfolio from any single sector to a maximum of 10 to further mitigate the risk of high sector concentration. However, the real estate sector holds a substantial percentage of the index. The ETF's top four holdings, which account for approximately 38% of its value, are all in the real estate sector.
Similar to the Invesco S&P SmallCap High Dividend Low Volatility ETF, this ETF, focusing on the Solactive Global SuperDividend Index, uses a blend of high dividend yields combined with a low beta, filtering out the 50 U.S.-listed stocks with the highest yields and lowest betas of 0.85 or below. This rather low beta threshold eliminates a substantial number of stocks. The index also restricts any single sector to only 12 out of its 50 holdings and limits its total dollar-weighting to 25%. This results in a relatively low-risk pool, even though the ETF remains highly concentrated with a generous 5.6% dividend yield.
This ETF's filters primarily favor the utilities sector, accounting for roughly 21% of its worth. Given the controlled environment and consistent performance of many utilities (though not all), this isn't all that unexpected. The energy sector comes in as the second-largest sector, while real estate claims the third spot.
Even though the Global X SuperDividend ETF is more focused than the Invesco ETF, these other factors contribute to reduced risk. In addition, this ETF is equal-weighted, which means that during rebalance, each stock is assigned a 2% weighting. These rebalances occur only once a year, at the end of February. As we move further away from February, the weightings will naturally diverge based on the performance of the individual stocks.
Overall, the Global X SuperDividend U.S. ETF is an excellent selection for those seeking stable, bond-like investments that still offer some potential for growth and diversification across various sectors.
In light of this discussion, investing in high-dividend ETFs can be beneficial, even during market downturns, as they provide consistent dividend payouts and the opportunity for reinvestment at lower prices. For instance, the WisdomTree U.S. High Dividend Fund offers a commendable yield of 3.5%, and its unique strategy of selecting and weighing stocks based on dividends can help balance size, strength, and yield.
When considering higher yields with potentially higher risk, the Invesco S&P SmallCap High Dividend Low Volatility ETF could be an option. Despite its high yield of 6.9%, it employs filtering steps to manage risks associated with small-cap stocks and high yields. By focusing on low volatility stocks, the ETF aims to offset some of the inherent risks.