Dividend exchange-traded funds (ETFs) are designed to invest in a basket of dividend-paying stocks. Stable, attractive dividends tend to be associated with bigger, less risky blue-chip companies, although any company can share their earnings with shareholders, and some of the highest yields are offered by smaller, less established names. Many ETFs operating in this space favor stable income with room to grow. However, others might pursue higher, potentially less secure dividend payments in the hope that such generosity is sustainable and not detrimental to the company's finances or future growth prospects.
- The top three dividend ETFs have significantly outperformed the broader U.S. market over the past year.
- The dividend ETFs with the best one-year trailing total return are KBWD, CSB, and SDVY.
- The top holdings of these ETFs are Orchid Island Capital Inc., American National Group Inc., and Jefferies Financial Group Inc., respectively.
Dividend ETFs often are favored by more risk-averse, income-seeking investors. They also are used by investors to balance riskier investments in their portfolios. In addition to offering a regular income stream, these ETFs generally offer much lower management expense ratios (MERs) than dividend-focused mutual funds.
There are 90 dividend ETFs that trade in the U.S., excluding inverse and leveraged ETFs as well as funds with less than $50 million in assets under management (AUM). In the 12 months leading up to Aug. 11, 2021, the top three dividend ETFs significantly outperformed the S&P 500, which in this time frame delivered a total return of 35.5%. The best-performing dividend ETF, based on performance over the past year, is the Invesco KBW High Dividend Yield Financial ETF (KBWD). We examine the top three best dividend ETFs below. All numbers are as of Aug. 11, 2021.
- Performance Over One-Year: 57.4%
- Expense Ratio: 1.24%
- Annual Dividend Yield: 6.79%
- Three-Month Average Daily Volume: 142,242
- Assets Under Management: $436.1 million
- Inception Date: Dec. 2, 2010
- Issuer: Invesco
KBWD tracks the KBW Nasdaq Financial Sector Dividend Yield Index, a modified-dividend, yield-weighted index of companies whose primary business is providing financial services and products. The ETF offers exposure to banks and other financial institutions that pay dividends. Though it invests in both growth and value stocks across the market-cap spectrum, the majority of its holdings are in small-cap value stocks. This makes KBWD a somewhat risky bet because many of the securities that make up its portfolio are issued by companies that are not the most fiscally stable. For this reason, the fund is better aimed at investors with a high risk tolerance.
KBWD's top three holdings include Orchid Island Capital Inc. (ORC), a specialty finance company that invests in residential mortgage-backed securities (MBS) on a leveraged basis; FS KKR Capital Corp. (FSK), a business development company that provides customized credit solutions; and TCG BDC Inc. (CGBD), a specialty finance company that provides flexible financing solutions to middle-market companies.
- Performance Over One-Year: 57.1%
- Expense Ratio: 0.35%
- Annual Dividend Yield: 2.99%
- Three-Month Average Daily Volume: 25,072
- Assets Under Management: $257.0 million
- Inception Date: July 8, 2015
- Issuer: Crestview
CSB tracks the Nasdaq Victory U.S. Small Cap High Dividend 100 Volatility Weighted Index, which gauges the performance of the top 100 dividend-yielding stocks within the broader Nasdaq Victory U.S. Small Cap 500 Volatility Weighted Index. The ETF provides exposure to some of the highest dividend-yielding small-cap stocks in the U.S. Smaller companies tend to exhibit higher volatility, increasing the risk associated with investing in this fund. Also, dividend payouts are never guaranteed.
CSB follows a blended strategy, investing in a mix of both value and growth stocks, and the financial sector receives the largest allocation in the fund, followed by industrials and utilities. The ETF's top three holdings include American National Group Inc. (ANAT), an insurance company; MGE Energy Inc. (MGEE), a utility holding company that produces and distributes electricity and natural gas; and American States Water Co. (AWR), a water and electricity utility company.
- Performance Over One-Year: 55.9%
- Expense Ratio: 0.60%
- Annual Dividend Yield: 1.07%
- Three-Month Average Daily Volume: 79,691
- Assets Under Management: $178.7 million
- Inception Date: Nov. 1, 2017
- Issuer: First Trust
SDVY tracks the Nasdaq U.S. Small Mid Cap Rising Dividend Achievers Index, which is designed to track 100 small- and mid-cap companies that have a history of raising their dividends and are expected to continue doing so in the future. The ETF follows a blended strategy, investing in both growth and value stocks, with financials receiving the largest allocation within the fund, followed by industrials and consumer discretionary stocks.
SDVY's top three holdings include Jefferies Financial Group Inc. (JEF), an investment bank and financial services company; Tetra Tech Inc. (TTEK), a provider of consulting, engineering, program management, construction management, and technical services; and Crane Co. (CR), a designer and manufacturer of highly engineered industrial products.
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