High-dividend exchange traded funds struggled against the broader market last year. Just look at the iShares Select Dividend ETF (NASDAQ: DVY), one of the largest such funds. DVY trailed the S&P 500 by almost 700 basis points in 2017.
Several of the S&P 500’s highest-yielding sectors were also among the worst-performing groups in the benchmark U.S. equity gauge last year.
At year’s end, 83 percent of S&P 500 constituents paid a dividend, with the dividend payers yielding 2.2 percent, above the broader index’s 1.9 percent average,” CFRA Research Director of ETF & Mutual Fund Research Todd Rosenbluth said in a note. “The highest-yielding sectors for the S&P 500 were telecom services (5.1 percent), utilities (3.4 percent), real estate (3.3 percent), energy (2.7 percent) and consumer staples (2.7 percent).”
Depending On Dividends
While 2017 was not a banner year for some dividend ETFs, historical data indicate dividends are an integral part of total returns. For nearly three decades, the S&P 500 has averaged annualized returns of 9.8 percent, with 31 percent of that figure attributable to dividends, according to CFRA.
DVY, which has nearly $18 billion in assets, allocates nearly 37 percent of its combined weight to utilities and energy stocks, explaining the ETF’s 2017 struggles. Energy was the worst-performing sector in the S&P 500 last year, while utilities finished the year in a tailspin and on the brink of correction territory.
DVY is dividend-weighted and its nearly 100 components are required to have paid a dividend for at least the past five years, but many of the fund’s holdings have dividend increase streaks far longer than that.
The PowerShares S&P 500 High Dividend Low Volatility Portfolio(NYSE: SPHD) is another idea for income investors to consider. SPHD holds the 50 S&P 500 stocks with the lowest trailing 12-month volatility and highest dividend yields. That gives the ETF a combined weight of 40 percent to the real estate and utilities sectors, in part explaining why the fund returned just 12 percent last year.
The $3-billion SPHD has a 12-month distribution rate of 3.14 percent and could be worth a look if value stocks rebound, as nearly two-thirds of SPHD components are considered value plays. SPHD pays a monthly dividend.
CFRA has Overweight ratings on DVY and SPHD.
Todd Shriber owns shares of SPHD.
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