Factor series – High dividend yield ETFs

Introduction to high dividend yield stocks

When considering whether a dividend yield ETF might be a suitable investment, it is important to pay attention to the individual securities that comprise the fund. Dividend yield is a term that helps investors evaluate the potential return of every dollar invested. While the actual stock price may fluctuate widely, a dividend can provide investors with more security knowing that they will receive a tangible amount of cash in return.

Dividend yield is calculated as the dividend per share divided by the price per share (usually on an annual basis). In other words, it can be described as: how many dollars of dividends I am receiving for the price that I am currently paying. A stock that has a dividend yield of 5% means that for every $1 I invest in this stock, I should expect $0.05 every year. 

Now, this is not always the case, as some companies raise or cut their dividend over time. Also, the fluctuation of a stock’s price will impact the dividend yield as well.

Attractiveness of high dividend yield stocks

Many investors favor high dividend yield stocks because they don’t want their return to be based solely on stock price appreciation, especially when share prices are so volatile.  If an investor is happy with a 5% dividend yield, and they are confident that the dividend yield will not be cut, then essentially they needn’t worry about the stock price and can continue holding the stock and receiving their dividend consistently.

Of course, the important part of high dividend investing is to try and find companies that have a stable, growing dividend that is supported by the free cash flow generation of the company. Some examples include Coca-Cola, Proctor & Gamble, and AT&T to name a few. These are ‘defensive’ stocks that generally do well in times of slow economic growth or recession since investors can count on the stability of their dividends.

High dividend yield stocks come in handy for investors who would like to have a consistent stream of income. However, it must be noted that these investments are subject to normal risks expected of any equity investment. Furthermore, investors should keep in mind that dividend income is an automatic taxable event in most cases, whereas with stock appreciation an investor can choose when to trigger their taxable event.

Examples of High Dividend Yield ETFs    

Some examples of high dividend yield ETFs include:

VYM (Vanguard High Dividend Yield ETF)

AUM: $48.7B

Expense Ratio: 0.06%

YTD performance: -3.0%

SCHD (Schwab U.S. Dividend Equity ETF)

AUM: $40.5B

Expense Ratio: 0.06%

YTD performance: -6.3%

DGRO (iShares Core Dividend Growth ETF)

AUM: $23.7B

Expense Ratio: 0.08%

YTD performance: -10.3%

Data for this article is as of October 31, 2022.

Please note this article is for information purposes only and does not constitute investment advice.