High Yield vs Dividend Growth ETFs

“Dividend ETF” covers a surprisingly wide range of funds. Some chase the biggest yields they can find. Some deliberately avoid them. Some care more about how long a company has paid than how much. Knowing which family a fund belongs to tells you most of what to expect from it before you look at a single number.

The five families

High yield funds

These rank companies by yield and buy the top of the list, sometimes with a light screen. SPYD simply holds the 80 highest yielding stocks in the S&P 500 in equal weights. VYM casts a wider net, holding hundreds of companies with above average yields, weighted by size, which makes it far more diversified and less extreme. DVY weights its holdings by yield, so the highest yielders get the most money.

Trade off: the most income now, but a pure yield ranking can pull in companies whose yields are high because their prices have collapsed. These funds lean heavily on utilities, energy, financials, real estate and consumer staples, and they tend to lag when technology leads.

Dividend growth funds

These care about the direction of the dividend more than its size. VIG requires at least ten consecutive years of increases, then throws out the 25% of companies with the highest yields, on the theory that those yields are the most likely to be in trouble. DGRO requires five years of growth and a payout ratio below 75%. The result is a portfolio of steadier, faster growing businesses with a low starting yield.

Trade off: less income today, more growth in income and share price over time. These funds own more technology, healthcare and industrials, so they tend to behave more like the broad market.

Quality plus yield

This group tries to have it both ways. SCHD, one of the most popular dividend ETFs in America, starts with companies that have paid dividends for at least ten years, then scores them on cash flow relative to debt, return on equity, yield and five-year dividend growth, and keeps the top 100. The idea is a yield noticeably above the market, from companies sturdy enough to keep paying.

Trade off: the screens rebalance once a year, which can mean big changes in what the fund holds and occasional long stretches of lagging the market when its style is out of favor.

Streak based funds

These are built from lists like the Dividend Aristocrats. NOBL holds every S&P 500 company with 25 or more years of raises in equal weights. SDY uses a 20 year rule across a wider universe and weights by yield. You met the Aristocrats in The Dividend Aristocrats.

International funds

Companies in Europe, the UK, Canada, Australia and Asia often pay out a larger share of their profits than American firms, so international dividend ETFs usually yield more. They also add two complications: currency swings (a falling euro lowers the dollar value of European dividends) and foreign tax withheld before the money reaches you, which you can often reclaim in a taxable account. That’s explained in Foreign Dividends and Withholding Tax.

Side by side

Yield today or growth tomorrow?

The choice between a high yield fund and a dividend growth fund is really a question about time. The chart below compares the income from $10,000 in a fund yielding 4.5% with dividends growing 3% a year, against one yielding 1.6% with dividends growing 9% a year. Change the numbers to match the funds you’re considering.

If you need income now, the high yield fund gives you more of it for well over a decade. If you’re twenty years from retirement, the growth fund will likely be paying you more by the time you need it, and its share price has historically tended to grow faster too.