S&P 500 companies flush with cash are turning on the dividend spigot again. And dividend ETFs offer an easy way to partake in the windfall.
Thanks to increases from companies like McDonald’s (MCD) and Lockheed Martin (LMT) in September, the S&P 500’s dividend payout this year is likely to hit a record, rising 5% from 2020, says Howard Silverblatt, equity strategist at S&P Dow Jones Indexes.
Just in August alone, 27 S&P 500 companies upped their dividends, three started them and not a single dividend got cut. And the median dividend increase was 7% in the month, Silverblatt says.
“Dividends continued to improve, as Covid-19 vaccine availability was plentiful, permitting a wider reopening of America,” Silverblatt said. And expect more dividend hikes.
S&P 500 Companies Boosting Dividends
Trillions of dollars of cash are piling up on S&P 500 companies’ balance sheets. And with rock-bottom yields on cash, companies are looking for the best way to put money to work. One way is to entice investors by paying out more dividends.
A 5% dividend hike in 2021 is the most likely. And that would notch the 10th-straight year of record annual dividend payments. But Silverblatt thinks it’s possible for dividends to surprise further on the upside, too.
“Larger gains were based on broader Covid treatment progress, consumer reaction, and an (even larger) surge in discretionary spending,” Silverblatt said.
Dangers Of Chasing Dividends
It might be tempting to chase after some of the higher yielding S&P 500 stocks and try to cash in. But that presents risks of its own.
AT&T looms as the largest cautionary tale. The telecommunications giant yields 7.7%, which ranks it No. 2 in the S&P 500 in terms of dividend yield, says S&P Global Market Intelligence.
But it’s unclear what the future of that dividend might be, now that it’s restructuring its business to better compete against other wireless carriers, says Charlie Toole, portfolio manager at Advisor Investments. Shares of AT&T are already down roughly 5% this year.
And that’s why Toole advises spreading your dividend-hunting dollar around more, pinpointing a subset of dividend paying companies. ETFs are well-suited to do this.
Using ETFs To Cash In On Dividends
Targeting a group of the so-called Dividend Aristocrats is one possible solution. The Dividend Aristocrats is an elite group of S&P 500 companies that boosted dividends every year for 25 years.
The $8.8 billion-in-assets ProShares S&P 500 Dividend Aristocrats ETF (NOBL) is the largest ETF that specifically targets these companies. The ETF holding more than 60 companies’ shares yields north of 1.91%. That’s not anywhere near the 7.7% yield of the S&P 500’s top yielding stock, Lumen Technologies (LUMN). But it handily beats the SPDR S&P 500 ETF Trust’s (SPY) 1.28% yield. And all the holdings are committed to annual hikes in dividends.
If dividend growth is the goal, that’s the target of the Vanguard Dividend Appreciation ETF (VIG). And with more than $62 billion in assets, it’s also the largest dividend ETF, says ETF.com.
It holds roughly 250 companies that bumped up dividends for at least the past 10 years. As it weights holdings by market value, technology is the ETF’s top holding at nearly 20%. Microsoft (MSFT) alone accounts for 4.5% of the ETF. But given the focus on technology, the ETF’s yield is a little lower at 1.61%.
Shooting For Higher Than S&P 500 Yields
If you’re looking for high dividend yields from a major ETF, though, it’s hard to top the $7.2 billion-in-assets iShares Core High Dividend ETF (HDV). It’s yielding roughly 3.5%, the highest yield of any of the largest dividend ETFs.
The ETF uses a stringent formula to find its roughly 75 holdings. To join the ETF, the stocks must make it through two Morningstar screens. The first one measures if the high-yield company is somewhat protected from competition. And the other weights companies with strong balance sheets.
But no matter what, ETFs help you participate in the dividend boom, without counting too much on one company.
Largest Dividend ETFs
|ETF||Symbol||Assets (in billions)||Expense ratio||Yield|
|Vanguard Dividend Appreciation||(VIG)||$61.90||0.06%||1.61%|
|Vanguard High Dividend Yield||(VYM)||37.6||0.06||2.83|
|Schwab U.S. Dividend Equity||(SCHD)||27.4||0.06||2.96|
|iShares Core Dividend Growth||(DGRO)||20.2||0.08||2.03|
|SPDR S&P Dividend||(SDY)||18.8||0.35||2.86|
|iShares Select Dividend||(DVY)||17.9||0.39||3.05|
|First Trust Value Line Dividend Index||(FVD)||11.8||0.70||2.03|
|ProShares S&P 500 Dividend Aristocrats||(NOBL)||8.8||0.35||1.94|
|iShares Core High Dividend||(HDV)||7.2||0.08||3.55|
|WisdomTree U.S. Quality Dividend Growth||(DGRW)||6.3||0.28||1.91|
Sources: IBD, S&P Global Market Intelligence, ETF.com
Follow Matt Krantz on Twitter @mattkrantz
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