2 Tier 1 ETFs for Stock Dividends | Smart Change: Personal Finance
Exchange-traded funds (ETFs) designed to generate income from dividends are becoming more and more popular in this market cycle as investors seek investments that can offset losses in their portfolios. Dividend-focused ETFs can provide income if you decide to take the dividends, but they can also increase the overall return of your ETFs when you reinvest them.
An added benefit of today’s income-focused ETFs is that they yield higher returns than other types of equity investments, mainly because they invest in large, stable companies that can withstand volatility better than most. These two ETFs share that dual advantage of generating solid dividend income and producing market-beating returns.
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iShares Core High Dividend ETF
The iShares Core High Dividend ETF (NYSEMKT: HDV) It tracks an indicator that includes high dividend stocks – the Morningstar Dividend Yield Focus Index. It contains stock that produces high returns while also meeting monitors for company quality and financial health. The portfolio consists of 75 stocks, most of which are big-name names.
The three largest holdings are ExxonMobil (7.1%), Johnson & Johnson (6.7%) and Verizon (6.0%). About 23.6% of the portfolio is in the healthcare sector stocks, while 18.4% is in the energy sector, and 16.6% is in basic consumer goods.
The ETF has a 12-month post-yield of 3.12% and recently paid a dividend of $0.57 in June. Over the past 12 months, it has paid out $3.15 per share in dividends. As for returns, they are basically flat year to date and have increased by about 5% over the past year, outperforming that Standard & Poor’s 500 in both cases. June was a rough month, dragging down the fund’s yield.
As of May 31, it boasted a five-year total annual return of 9.2% and a 10-year annualized return of 10.6%. It also has a low spend ratio of 0.08%.
Pacer Global Cash Cows Dividend ETF
The Pacer Global Cash Cows Dividend ETF (NYSEMKT: GCOW) It tracks an index called Pacer Global Cash Cows High Dividend 100 Index. The index consists of stocks meeting two screens covering the FTSE Developed Large-Cap Index, which includes 1,000 stocks.
First, it screens the companies with the highest free cash return. Free cash flow is the cash a company has after covering operating and capital expenditures. The higher the free cash flow, the better for the company to pay a fixed dividend. Then, from those companies, you search for the ones with the highest dividend yield.
The index, and thus the ETF, is made up of 100 stocks that best meet these screens, weighted by their dividend yield. Currently, the three largest holdings in the portfolio are Abvi (2.3%), GlaxoSmithKline (2.2%), and AT&T (2.2%). The largest sector is materials with 19.5%, followed by healthcare with 17.6% and energy with 17.5%.
It has a 12-month post yield of 4.38% and paid a dividend of $0.29 in June. Over the past 12 months, it has paid out $1.45 per share in dividends. The stock price is down about 2% year-to-date and has fallen to roughly the same level over the past twelve months. But as of May 31, it had a five-year annualized return of 7.7%. The expense ratio is slightly higher than the iShares ETF at 0.60%.
These are two of the best performing broad market ETFs. With their focus on stable businesses with plenty of cash, they should be able to navigate any choppy seas ahead.
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Dave Kovaleski has no position in any of the listed stocks. The Motley Fool recommends GlaxoSmithKline, Johnson & Johnson, and Verizon Communications. Motley Fool has a disclosure policy.