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Talking About Yield With Dividend ETFs

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Talking About Yield With Dividend ETFs

Ten-year Treasury yields closed at a paltry 1.49% on Tuesday, so it's not particularly surprising some investors are clamoring for high dividend strategies and doing so with exchange traded funds.

What Happened

Four of the 10 largest domestic dividend ETFs are yield-based strategies and while each of those funds are trailing the S&P 500 on a year-to-date basis, all four offer higher dividend yields than the benchmark U.S. equity gauge and each has some defensive positioning that could prove useful if markets continue faltering.

Year to date, the Vanguard High Dividend Yield ETF (NYSE: VYM) and the iShares Core High Dividend ETF (NYSE: HDV) are each up about 10%, putting them atop the yield-based dividend ETF field.

“Four of the ten largest U.S. dividend ETFs can be considered dividend-yield oriented. These ETFs offer 12-month yields above 3% and have relatively high exposure in defensive sectors,” said CFRA Research Director of ETF & Mutual Fund Research Todd Rosenbluth in a note out Tuesday.

Why It's Important

The $7 billion HDV, which tracks the Morningstar Dividend Yield Focus Index, holds 75 stocks and has a trailing 12-month yield of 3.26%.

HDV's 10.27% year-to-date gain is arguably impressive when noting the fund devotes over 40% of its combined weight to energy and healthcare stocks. Those are two of this year's worst-performing sectors.

For investors looking to skirt the risks associated with the energy patch while still maintaining yield exposure, the iShares Select Dividend ETF (NYSE: DVY) makes sense. That ETF is also up about 10% this year, but is more traditional in its yield approach as it allocates 27% of its weight to the utilities sector. That makes DVY positively correlated to declining interest rates while driving a trailing 12-month yield of 3.36%.

What's Next

“DVY holds only 102 securities that have paid dividends for the last five years and have a sufficiently strong earnings-to-dividend-per-share coverage ratio,” said Rosenbluth.

That's an important consideration with high dividend strategies because some high-yield stocks are burdened by their dividends and could cut or suspend those payouts.

CFRA has Overweight ratings on each of the ETFs mentioned here. Over the past three years, DVY and HDV have been the least volatile of the four big yield-based ETFs.

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Latest Ratings for DVY

DateFirmActionFromTo
Apr 2016MaintainsEqual-Weight

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