Income investors love to have dividend stocks in their
portfolios. Dividends deliver returns through a down market and allow investors
to avoid locking in losses by liquidating down positions. The liquidity, tax
efficiency, and diversification provided by exchange-traded funds (ETFs) have
made them among the most popular financial vehicles, so there's a substantial
appetite for ETFs that can deliver the benefits of strong dividend stocks.
This article picks through the ETF universe to identify 10
different ETFs with different exposures and methodologies. They all bring
fantastic characteristics to the table in the form of healthy distribution
yields, reasonable fees, satisfactory valuation, and ample liquidity.
Distribution yield represents trailing 12-month
distributions to shareholders divided by the fund's net asset value (NAV). This
measures the cash flow moving to shareholders, much like stocks' dividend
yields. Investors should be aware that distribution yields are different from
dividend yields, but distributions from dividend-focused ETFs should correlate
to fund dividend income over the long term. The current S&P 500 weighted
average dividend yield is around 1.7% and has hovered around 2% in recent
periods, so this list identifies ETFs with distribution yields exceeding that
level.
Investors avoid high expense ratios, because these reduce
returns. Inefficient or over-priced management incurs losses that compound over
the long term. However, some fund managers justify higher expense ratios by
adding unique value, so funds with proprietary, specialized, or complex
methodology have predictably higher expenses. The average ETF expense ratio is
around 0.45%, so this is a useful benchmark to avoid excessive fees.
Liquidity is an important characteristic for any holding.
Narrow bid-ask spreads reduce transaction costs and make it relatively easy to
purchase investments near a given market spot price. Active markets also ensure
that investors will be able to exit a position promptly at a reasonable price.
Established ETFs with high assets under management (AUM) and sufficiently high
average daily volume (ADV) should meet the basic needs for reputation,
management quality, efficiency of scale, and liquidity.
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