“OK, I buy the dividend argument, now what?”

This is something I hear quite a bit. After going through the argument for investing based on dividends, which I summarized in my blog summarizing my top dividend posts, many investors don’t know what to do next. Basically, there are two choices which I will discuss in this and the following post. The first choice is to use dividend ETFs to gain exposure to dividends. The second is individual dividend stocks which I’ll cover in the next post. Lets take a look at dividend ETFs and if they stack up to the promise of dividends.

The choice of dividend ETFs has expanded considerably in the last 5 years so finding a dividend ETF is pretty easy these days. A quick look at the dividend ETF list at ETFdb yields 44 dividend ETFs traded in the US that an investor can choose from. Here is the list of all dividend ETFs traded in US with assets over $500M and with good liquidity.

No lack of choices to be sure. But have dividend ETFs lived up to the promise of dividend investing; higher returns, reduced volatility, lower drawdowns, and consistent income? To find out I looked at the major US dividend ETF and how they performed over the last 5 years, from 2007 through 2011. The data came from ETFreplay and from the dividend history on ETF’s websites. The table below summarizes the results.

Overall, dividend ETFs have delivered on maybe the most important promise of higher total returns but the results are not so great on the other metrics. Volatility is about the same as the market in general, as are drawdowns. The annual max dividend cuts were larger than the index as well which is critical for investors who depend on dividends as part of their income. Also, on the dividend front its important to note that in only one of these ETFs have the dividends come back to their pre-crash levels. And even worse just to keep up with inflation over the last 5 years dividends would need to be 7% higher than 2007 levels. The only dividend ETF that has managed this is VIG, the Vanguard Dividend Growth ETF.

In general I think dividend ETFs are fine for investors who do not have the time or inclination to pick individual stocks. You get higher total returns for sure. And on the other metrics you do no worse than the overall index. But for me those other metrics, in particular drawdowns and dividend cuts, are very important. And in this regard investors can do much better than investing in dividend ETFs and that choice is individual dividend stocks. I’ll cover where to find and how to choose high quality dividend stocks in my next post.


3 thoughts on “ Searching for dividends: ETFs

  1. Paul, I have owned 3 of the ETFs listed in your first table and currently own 2 of them. Of interest to me, you listed DWX in the first table, but not the second. Based on the 2011 dividends and the current price of $49.24, DWX is paying a 6.69% yield; tough to beat, though some are understandably reluctant to divvy in European stocks right now. Just wondering why you did not include DWX in the second table? Could you comment on it (for me, I find it a good way to access international dividends and get a quarterly, versus a simi-annual or annual payout which is quite common with international dividend paying stocks)?

    1. J, DWX didn’t meet my 5 years of history requirement. I just did a quick analysis of DWX vs EFA on ETFreplay and it shows a little better total returns than EFA, -19% vs -21% but with higher volatility, higher drawdowns, and worse dividend cuts. And both of them have done much worse than SPY. No thanks. I’m not an indexer or and asset allocator so I don’t have to have international exposure just to have it. If I want international dividends I’ll pick individual stocks.
      6.69% is not that hard to come by at home.


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