The stock markets are on an incredible run currently. All three major U.S. stock indexes are flying high on investor optimism over a potential new stimulus bill. However, as part of a defensive portfolio move, many investors are shifting some of their investments to secure stable and reliable sources of income as a hedge against a market correction that might be occur if their high expectations regarding the bill are not realized or if problems arise in the deployment of COVID-19 vaccines.
Exchange traded funds (ETFs) with an emphasis on dividends are becoming increasingly popular amid the pandemic. Dividend investing is arguably one of the best options now for investors to generate consistent income. However, investing in high-dividend-yielding stocks could be tricky because there is the potential for them to weaken in the near term should any new negative coronavirus surprises present themselves. ETFs help investors mitigate this risk in that they hold broad and diversified stock exposure at minimal operating costs.
Vanguard High Dividend Yield ETF (VYM), Vanguard Real Estate ETF (VNQ), and WisdomTree Emerging Markets High Dividend Fund (DEM) are three dividend-paying ETFs that not only have strong price appreciation potential but could also be a steady source of income.
Vanguard High Dividend Yield ETF (VYM)
VYM offers a diversified, conservative approach to high dividend yield in a low-cost wrapper. The fund seeks to track the performance of the FTSE High Dividend Yield Index, a market-cap weighted index of high-dividend-paying large-cap U.S. companies.
The ETF has an impressive record of increasing its quarterly dividends over the last 10 years. The most recent dividend declared by VYM was $0.7053 in September. In the past three years, the fund has grown its dividend at a CAGR of 8.8%. While the four-year average dividend yield for VYM is 3.18%, the ETF’s annual dividend totals $2.88, representing a 3.14% dividend yield.
VYM has $31.16 billion in AUM and an expense ratio of 0.06%. The ETF has an MSCI ESG Fund Rating of A, based on a score of 5.87 out of 10.
The fund currently holds 414 companies with weightings of 19.1% to Financials, followed by a 15.6% and 14.7% to the Consumer Staples and Healthcare sectors, respectively. The top three holdings of the fund are Johnson & Johnson (JNJ), The Procter & Gamble (PG) and JPMorgan Chase & Co (JPM), with weightings of 3.8%, 3.5% and 3.1%, respectively.
VYM has lost 2% year-to-date, to close yesterday’s trading session at $91.84. However, the ETF has witnessed net inflows of $1.29 billion in the past three months and is up 10.4% in the same period. VYM is currently trading just 3.2% below its all-time high of $94.86.
How does VYM stack up for the POWR Ratings?
A for Trade Grade
A for Buy & Hold Grade
B for Peer Grade
A for Industry Rank
A for Overall POWR Rating.
It is ranked #3of 83 ETFs in the Large Cap Value ETFs group.
Vanguard Real Estate ETF (VNQ)
VNQ offers exposure to U.S. property trusts that cover approximately two-thirds of the value of the entire U.S. real estate investment trust (REIT) market. REITs might appeal to investors seeking current income because these trusts must distribute at least 90% of their income to investors, and they offer an efficient way for investors to gain indirect exposure to the real estate class. The ETF tracks the performance of the MSCI US IMI Real Estate 25/50 Transition Index, diversified across multi-cap equity publicly traded REITs and other real estate-related investments.
VNQ pays dividends on a quarterly basis, and its last pay-out was of $0.5901 on September 30, 2020. The ETF has grown its dividend at a CAGR of 4.8% over the past 10years. While the four-year average dividend yield for VNQ is 4.39%, the current annual dividend of $2.95 translates to a 3.44% yield.
VNQ has $30.97 billion in AUM and an expense ratio of 0.12%. The ETF has an MSCI ESG Fund Rating of BBB, based on a score of 4.33 out of 10.
The fund currently holds 180 companies, with the maximum exposure of 42% to Specialized REITs. This is followed by a 40.3% and 13.4% exposure to Commercial REITs and Residential REITs, respectively. The top three holdings by the ETF are Vanguard Real Estate II Index Fund (VRTPX), American Tower Corporation (AMT) and Prologis, Inc. (PLD), with weightings of12.3%, 7.6% and 5.5%, respectively.
VNQ has lost 6.6% year-to-date to close yesterday’s trading session at $86.72. However, the ETF has witnessed net inflows of $433 million in the past three months and has gained 5.7% in the same period. VNQ is currently trading 13% below its 52-week high of $99.72.
VNQ’s POWR Ratings reflect a promising outlook. It has an overall rating of “Buy” with an “A” for Trade Grade, and a “B” for Buy & Hold Grade and Peer Grade. Among the 26 ETFs in the Real Estate ETFs group, it is ranked #6.
WisdomTree Emerging Markets High Dividend Fund (DEM)
DEM offers exposure to some of the highest dividend yielding stocks in the emerging market world, with a fundamental weighting system. This ETF tracks the WisdomTree Emerging Markets High Dividend Index, a dividend-weighted index of emerging market stocks, and selects the top 30% of firms ranked by dividend yield from the index.
DEM pays quarterly dividends and most recently paid out $0.94 per share in September. It pays an annual dividend of $1.84, which yields 4.42% at the prevailing price. XLP’s four-year average dividend yield is 4.45%, while the ETF has grown its dividend at a CAGR of 17.3% in the past three years.
DEM has $1.73 billion in AUM and an expense ratio of 0.63%. The ETF has an MSCI ESG Fund Rating of BB, based on a score of 3.83 out of 10. With a focus on emerging markets, Taiwan, China, and Russia, are the top three economies to which DEM is exposed, with 24.7%, 16.6% and 15.1% weightings, respectively.
The fund currently holds 381 companies, with the financial sector leading the way with a nearly 34.4% weighting. The ETF also has an exposure of 18.3% and 12.7% to Basic Materials and Information Technology sectors, respectively. Its top three holdings are Vale SA, Sberbank of Russia and MMC Norilsk Nickel PJSC, with weightings of 6.6%, 6.1% and 3.7%, respectively.
DEM closed yesterday’s trading session at $41.61, with year-to-date loss of 9.1%. However, the ETF has witnessed net inflows of $8.24 million in the past month and it is up 6.7% in the same period. DEM is currently trading 10.9% below its all-time high of $46.68.
It is no surprise that DEM is rated a “Buy” in our POWR Ratings system. It also has an “A” for Trade Grade and Industry Rank, and a “B” for Buy & Hold Grade. Among the 97 ETFs in the Emerging Markets Equities ETFs group, it is ranked #71.
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VYM shares were trading at $91.46 per share on Friday afternoon, down $0.38 (-0.41%). Year-to-date, VYM has gained 0.20%, versus a 16.23% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...
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