Bryan Armour: This has been a banner year for stocks, and dividend stocks have enjoyed some of that success. Dividend ETFs typically take one of two approaches: targeting high dividend yield or dividend growth. High dividend yield ETFs prioritize income, and the best strategies control for quality to avoid companies whose trailing dividends appear high due to deteriorating fundamentals and stock prices. Dividend-growth ETFs focus on stable dividends by pulling in stocks that have a long history of growing dividends.
These two approaches capture different signals from a company’s dividends. As a result, their risk/reward profiles diverge. High dividend yield, as the name suggests, results in higher yields and lower growth. Dividend-growth strategies tend to hold successful, stable franchises, unlocking future growth at the expense of lower yield.
Investors can find success with either strategy. Today, I’ll highlight top-performing dividend ETFs year to date whose strategies mixed high yield and dividend growth to take different paths to similar levels of success.
3 Dividend ETFs Having a Great 2024
- Fidelity High Dividend ETF FDVV
- Vanguard Dividend Appreciation ETF VIG
- WisdomTree US Large Cap Dividend ETF DLN
First on my list is Silver-rated Fidelity High Dividend ETF, ticker FDVV. This is an unorthodox strategy that balances high yield and high quality. In 2024, it’s struck that balance particularly well by outperforming the broader market and landing in the top 5% of large-value funds.
How did it get there? Well, yield drives this ETF’s stock selection, but it also considers payout ratio and 12-month dividend growth. Adding these criteria emphasizes stocks with strong fundamentals that are likely to sustain their dividends.
The ETF pulls in the best-rated stocks from each sector using these standards, which typically include a 5%-10% allocation to international companies. Several adjustments are made before finalizing the portfolio. First, the index reallocates 40 percentage points of portfolio weight from the six lower-yielding GICS sectors to the five higher-yielding ones to boost yield; second, foreign stocks are capped at 10% of the portfolio; and, third, the index uses a toned-down market-cap-weighting scheme for those that make the final cut.
The resulting portfolio can carry some oddities due to the complicated index rules like Nvidia NVDA sitting atop the portfolio with over a 5% weight despite paying a quarterly dividend of exactly one penny per share. But for the most part, this ETF looks like a traditional high-dividend-yield strategy that tilts toward nontraditional sectors that impart bigger and higher-quality franchises.
Second on my list is Gold-rated Vanguard Dividend Appreciation ETF, ticker VIG. This ETF focuses on dividend growth, not yield, which lands in the large-blend Morningstar Category rather than large value like FDVV. That raised the bar in 2024, given the performance advantage year to date in that category. VIG has performed near the top of the value-leaning dividend ETF list, but its return sits near the average of its category peers, albeit with lower volatility.
What drives this ETF’s steady performance? This ETF’s index targets US companies with at least 10 consecutive years of increasing dividend payments. It eliminates the highest-yielding names from that cohort to ensure its holdings are financially stable and more likely to continue increasing dividend payments in the future.
The index weights its holdings by their free-float-adjusted market cap, which leverages the market’s collective wisdom and helps mitigate turnover and associated trading costs. It also limits individual stocks to 4% of the portfolio to promote diversification.
VIG’s portfolio is made up of industry stalwarts with wide moats and high profitability, where Apple AAPL, Broadcom AVGO, Microsoft MSFT, JPMorgan JPM, and UnitedHealth Group UNH sit atop the portfolio. Selecting stocks based on long-term metrics results in a stable portfolio with little turnover.
Last on my list is Silver-rated WisdomTree US LargeCap Dividend ETF, ticker DLN. This ETF’s year-to-date performance falls in the top 10% of large-value funds because its index construction looks beyond just yield.
The index pulls in 300 of the market’s largest dividend stocks by their projected cash dividends, then boosts those with the best combination of quality and momentum characteristics. Quality and momentum go a long way toward cutting risk and smoothing out performance. They also tilt the portfolio away from traditional large-value stocks to a more marketlike assortment of stocks.
Constraints around the edges help the portfolio avoid value traps. For example, stocks whose yield falls in the top 5% are excluded if their composite quality and momentum factor scores fall in the bottom half.
The targeted characteristics pull this large-value ETF’s portfolio somewhere between large-value and large-blend peers in terms of sector weights and risk factor exposures. That means companies like Nvidia make an appearance, but at a lower weight than they command in broad market indexes.
We expect all three of these ETFs to continue their history of risk-adjusted outperformance over the long term.
