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When size matters: Choosing among top-tier dividend payers

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Baskin-Robbins, with its 31 ice cream flavors, has nothing on the ETF industry. Advisors seeking dividend-focused ETFs for their clients have more than 150 to choose from.

But even with that array of flavors to choose from, it’s often those portfolios at the top of the asset heap that get the nod. Why? Stability for one — they are not about to fold because of inadequate investor interest. What’s more, they are from brand-name sponsors that your clients recognize.

Indeed, name recognition is one reason these ETFs have grown so large. Their sponsors represent four of the five largest asset gatherers in the ETF industry. Cost is another factor: Three of the five are among the cheapest ETFs available. And don’t forget seniority — four of the five are among the oldest dividend ETFs available.

All of this doesn’t mean that you should ignore the rest of the field. If you want to emphasize small- or mid-cap dividends, there are ETFs that concentrate on them. All of the big five screen out some payers, but if you want everything available, WisdomTree specializes in portfolios that include all dividend payers in a market or capitalization segment.

These five ETFs screen out some payers, but if you want everything available, WisdomTree specializes in portfolios that include all dividend payers in a market or capitalization segment.

Your choices will be determined by your clients’ needs. But for an all-purpose general dividend ETF, consider the five big ones. Here’s a closer look at how the five largest dividend ETFs differ:

The Vanguard Dividend Appreciation ETF (VIG, expense ratio: 0.08%)) is the biggest dividend ETF with $30.5 billion in assets. VIG is based on the Nasdaq U.S. Dividend Achievers Select Index, which requires 10 consecutive years of dividend increases and excludes limited partnerships and REITs. The ETF, which came public in April 2006, also applies proprietary screening criteria that are not disclosed by Nasdaq or Vanguard. Because Vanguard does not reveal end-of-month holdings until the middle of the following month, we can say that as of Sept. 30, VIG owned 182 stocks and that the largest sector holdings were industrials (32.80%), consumer services (20.10%) and health care (12.70%). For the year ended Nov. 9, VIG had a total return of 13.21%. Morningstar estimates its forward dividend yield at 1.88%.

The Vanguard High Dividend Yield ETF (VYM, 0.08%), launched in November 2006, has $22.07 billion in assets. The fund is based on the FTSE High Dividend Yield Index, a subset of the FTSE USA Index. All the dividend payers in that index are ranked by their indicated 12-month consensus dividend yield and roughly the top half of that universe constitutes the benchmark. REITs are excluded. At the end of September, VYM held 404 stocks with the largest concentrations in financials (15.90%), health care (13.80%) and consumer goods (12.70%). Through November 9, the portfolio had a 12-month total return of 6.95%. Morningstar estimates its forward yield at 3.14%.

The iShares Select Dividend ETF (DVY, 0.39%) is based on the Dow Jones U.S. Select Dividend Index. That index excludes REITs and requires constituent companies to have a five-year non-negative dividend-per-share growth rate, dividends paid in each of the past five years, earnings that are at least 67% higher than dividends on average for the past five years, and non-negative trailing 12-month earnings per share. The index (and resulting ETF) includes the top 100 qualifying companies as measured by dividend yield. Available since November 2003, DVY has $16.99 billion in assets. Largest sector positions are utilities (30.64%), consumer discretionary (13.90%) and energy (10.94%). DVY had a one-year total return of 6.99% through November 9. Estimated forward yield is 3.96%.

The SPDR S&P Dividend ETF (SDY, 0.35%) follows the S&P High Yield Dividend Aristocrats Index, which requires 20 consecutive years of shareholder payment increases. The index is weighted by annual dividend yield; stocks are drawn from the S&P Composite 1500 Index. The ETF, available since November 2005, has $16.16 billion in assets and holds 111 stocks. Sector leaders are financials (16.31%), industrials (16.9%), and consumer staples (15.46%). SDY returned 10.33% for the year ended November 9. Morningstar estimates forward yield at 2.85%.

The Schwab U.S. Dividend Equity ETF (SCHD, 0.07%) tracks the Dow Jones U.S. Dividend 100 Index, which requires member companies to have paid dividends for at least 10 years and have a minimum market cap of $500 million. REITs are excluded. Potential index components are screened on four factors: cash flow to total debt, return on equity, dividend yield, and five-year dividend growth. Issues are ranked by yield and the top 100 are included. Launched in October 2011, SCHD has $8.17 billion in assets. Through November 9, the fund had a one-year total return of 8.77%. As of Sept. 30, major concentrations were in consumer staples (21.85%), technology (20.66%) and industrials (19.22%). Estimated forward yield is 3.34%.

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