Dividend exchange-traded funds (ETFs) are designed to invest in a basket of dividend-paying stocks. Stable, attractive dividends tend to be associated with bigger, less riskyblue-chip companies, although any company can share their earnings with shareholders, and some of the highest yields are offered by smaller, less established names. Many ETFs operating in this space favor stable income with room to grow. However, others might pursue higher, potentially less secure dividend payments in the hope that such generous payouts are sustainable and not detrimental to the company’s finances or future growth prospects.
Dividend ETFs are often favored by more risk-averse, income-seeking investors. Investors also use them to balance riskier investments in their portfolios. In addition to offering a regular income stream, these ETFs generally offer much lower management expense ratios (MERs) than dividend-focused mutual funds.
Key Takeaways
- Dividend exchange-traded funds (ETFs) have outperformed the broader U.S. market over the past year.
- The dividend ETFs with the best one-year trailing total returns are FDL, HDV, and DHS.
- The top holding of each of these funds is Exxon Mobil Corp.
There are 109 dividend smart beta ETFs that trade in the U.S., excluding inverse and leveraged ETFs as well as funds with less than $50 million in assets under management (AUM). Dividend stocks, as measured by the benchmark , have outperformed the broader market in the past year. The index has provided a one-year trailing total return of -3.7% compared with -11.0% for the S&P 500, as of Sept. 1, 2022. The best-performing dividend ETF, based on performance over the past year, is the First Trust Morningstar Dividend Leaders Index Fund (FDL).
We examine the three best dividend ETFs for the fourth quarter (Q4) of 2022 below. All numbers are as of Sept. 1, 2022. In order to focus on the funds' investment strategy, the top holdings listed for each ETF exclude cash holdings and holdings purchased with securities lending proceeds except under unusual cases, such as when the cash portion is exceptionally large.
First Trust Morningstar Dividend Leaders Index Fund (FDL)
- Performance Over One-Year: 11.0%
- Expense Ratio: 0.45%
- Annual Dividend Yield: 3.58%
- Three-Month Average Daily Volume: 1,142,157
- Assets Under Management: $3.3 billion
- Inception Date: March 9, 2006
- Issuer: First Trust
FDL seeks to track the Morningstar Dividend Leaders Index, an index comprised of companies listed on the NYSE, NYSE Amex, or Nasdaq which have shown dividend consistency and dividend sustainability. The index does not include real estate investment trusts (REITs), traditionally a type of security providing strong dividends. The ETF invests mainly in large caps and uses a blended approach, holding both growth and value stocks. Energy stocks represent the largest share of the fund's portfolio at 20.2%, followed by financials and consumer staples companies.
The top holdings of FDL include Exxon Mobil Corp. (XOM), a global oil and gas company; AbbVie Inc. (ABBV), a biopharmaceutical company known for the immunosuppressive drug Humira; and Verizon Communications Inc. (VZ), a major telecommunications services provider.
iShares Core High Dividend ETF (HDV)
- Performance Over One-Year: 7.7%
- Expense Ratio: 0.08%
- Annual Dividend Yield: 3.41%
- Three-Month Average Daily Volume: 1,195,143
- Assets Under Management: $12.2 billion
- Inception Date: March 29, 2011
- Issuer: BlackRock Financial Management
HDV aims to track the Morningstar Dividend Yield Focus Index, composed of 75 established, relatively high dividend-paying U.S. stocks. Healthcare stocks represent over 22% of the portfolio, followed by energy and consumer staples companies. The fund focuses on large-cap stocks representing both value and growth characteristics.
HDV's portfolio is heavily concentrated, with the top 10 holdings accounting for more than 48% of invested assets. The top three names in the portfolio are Exxon Mobil; Johnson & Johnson (JNJ), a pharmaceutical, medical device, and consumer goods company; and Chevron Corp. (CVX), a global oil and company.
WisdomTree US High Dividend Fund (DHS)
- Performance Over One-Year: 6.9%
- Expense Ratio: 0.38%
- Annual Dividend Yield: 3.79%
- Three-Month Average Daily Volume: 78,606
- Assets Under Management: $1.2 billion
- Inception Date: June 16, 2006
- Issuer: WisdomTree
DHS tracks the WisdomTree U.S. High Dividend Index, an index of dividend yielding companies evaluated based on projected dividends for the coming year as well as factors including value, quality and momentum. The fund targets large-cap U.S. equities. Energy, pharmaceuticals biotechnology and life sciences, and food beverage and tobacco stocks make up the largest portion of the fund's portfolio, comprising over 55%.
The top holdings of DHS include Exxon Mobil; Chevron; and Coca-Cola Co. (KO), a global beverage producer and seller.
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