The stock market has been nothing if not volatile in 2022, with the CBOE Volatility Index soaring 49% year to date.
One investment that makes sense in times of market turmoil is dividend stocks. You can get a steady, sometimes rising, payout from them plus the opportunity for capital gains.
Morningstar compiled a list of four of its favorite dividend-stock exchange-traded funds. All four have outperformed the S&P 500 so far this year, and all have dividend yields above the S&P 500’s.
The S&P 500 has returned -20% year to date, and its dividend-yield stood at 1.75% on Nov. 3.
As for the Morningstar choices, “what differentiates these ETFs are their risk-mitigation tactics in the historically volatile high-dividend yield market segment,” writes Morningstar analyst Zachary Evens.
“Each is unique in this space, which has led to disparate returns, yields, and risk profiles so far this year.”
Here’s the list (returns through Nov. 2):
· Vanguard High Dividend Yield ETF (VYM). Return year to date: -4.11%. Dividend yield: 3.31%.
· Schwab US Dividend Equity ETF (SCHD). Return year to date: -7.7%. Dividend yield: 3.51%.
· Franklin U.S. Low Volatility High Dividend ETF LVHD. Return year to date: -7.21%. Dividend yield: 3.84%
· WisdomTree US High Dividend ETF (DHS). Return year to date: 4.45%. Dividend yield: 3.67%.
Comments on the Funds
Vanguard High Dividend: It “takes the simplest approach to selecting high dividend-payers,” Evens said.
“It captures the top 50% of the dividend-paying universe’s market cap, excluding [real estate investment trusts], and weights them by market cap. Market-cap weighting helps the fund mitigate the impact of value traps but takes away some of the emphasis on yield as a result.”
The fund is the best diversified of the four, with around 450 holdings and only 23% of assets concentrated in the top 10, Evens said.
Schwab US Dividend Equity: It “targets a narrower portfolio by tracking the Dow Jones US Dividend 100 Index, which also excludes REITs, and assigns each eligible stock a composite score based on four fundamental metrics,” Evens said.
“This additional screen should tilt the fund toward the quality factor and provide a smoother ride through turbulent markets. The final list of 100 names is weighted by market-cap, with some buffers around the edges to cut down on turnover.”
Franklin U.S. Low Volatility High Dividend: It includes REITs and uses profitability metrics to screen stocks for durable high dividends with low price and earnings volatility, Evens said.
“These screens are used to generate a stable yield score that is run through an optimizer to determine the final lineup and weighting of its 75-100 holdings,” he said. “The optimizer aims to maximize yield and minimize volatility, which this fund has done admirably.”
WisdomTree US High Dividend: It considers momentum when choosing stocks. “It uses a risk factor score to screen the dividend-paying universe for high-quality stocks with positive momentum,” Evens said.
“Stocks that make the cut are weighted by their projected cash dividend over the next year, which should help to maximize yield despite a relatively broad holdings list of 311 stocks.”
