Why Dividend ETFs May Be Worth a Look

Although the market has recently been notably volatile, many analysts predict that the current business cycle will continue in the U.S. for at least another year and perhaps even longer than that. As this momentum continues, higher stock prices are likely to occur as a result of substantial corporate revenue and earnings growth. Nonetheless, stock price appreciation will likely take place at a slow rate, just as the overall rate of growth may be sluggish. For this reason, price returns are likely to be small going forward, according to analysis at ETF.com. As a result, investors looking for total returns will likely shift their focus toward dividend income, although there are risks. Fortunately, there are many ways for investors to target dividend income in their investing practices, including a host of exchange-traded funds (ETFs) centering on this goal.

All told, there are roughly 40 high-dividend-yield ETFs currently available to investors. Together, these funds comprise more than $90 billion of combined assets. Thus, investors looking for dividend income in the ETF space have no shortage of options.

Among the most popular and largest of this group of funds are the ALPS Sector Dividend Dogs ETF (SDOG), the SPDR S&P Dividend ETF (SDY), the iShares Select Dividend ETF (DVY) and the Vanguard High Dividend Yield ETF (VYM). Below, we'll explore each of these funds in greater detail.

SDOG adopts a relativist approach in that it tracks an equal-weighted index of the top five highest-yielding stocks from the S&P 500 for each sector. Central to the strategy that SDOG has adopted is the assumption that high-yielding equities tend to experience faster rates of appreciation than their lower-yielding counterparts. Investors who share in this belief may wish to focus on the top-yielding S&P 500 stocks by buying into SDOG.

SDY is intently focused on companies able to provide sustainable income through dividends. This ETF invests in companies that have bolstered their dividends over the past 20 years. Although this is a strict criterion on which to base the ETF portfolio, SDY looks at companies from within the S&P 1500 space, providing it additional options over SDOG and other high-dividend-yield ETFs focused on smaller pools of stocks. SDY is available for a 0.35% expense ratio.

While SDY has a more extreme approach to targeting companies with dividend growth, DVY is somewhat less stringent. DVY looks for those companies that have been able to pay increasing dividends over five-year periods. It also factors in payment history and payout ratio in its search. Securities in the portfolio are dividend-weighted. Perhaps because of the additional scrutiny that SDY subjects potential portfolio members to, this fund carries a higher expense ratio of 0.39%.

Of the four ETFs explored in detail here, VYM is the largest. In fact, at $21 billion in assets, it is the largest high-dividend-yield ETF compared against all of its peers. VYM also includes one of the broadest approaches to dividends in this pool, looking at companies' forecasts for dividends over the coming 12 months. All of the companies in the top half of those ranked are selected for the portfolio. Then, stocks are weighted by market cap, not factoring in dividends after that point. In exchange for the broadly generalized approach to portfolio-building, investors interested in VYM can enjoy its low expense ratio of just 0.08%.

While there is no guarantee that the market will continue along its current path, investors worried about slow growth and low price returns may wish to turn their attention to dividend-focused ETFs like those listed above.