Bond yields are depressed by historical standards and even if interest rates rise multiple times next, as some experts believe is going to happen, yields on U.S. government debt are unlikely to excite income investors.
Trouble is yields on broader equity benchmarks are low, too. For example, the dividend yield on the S&P 500, as of Dec. 8, is a paltry 1.25%. The bright spot in the income equation is that dividends are growing – so much so that domestic payouts are back to levels seen prior to the coronavirus pandemic.
“Dividends are back as record earnings, sales, and margins have permitted companies to return to the business of returning shareholder wealth,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. “Larger dividend increases and a lack of cuts produced a record payment to S&P 500 shareholders in Q3 2021. Based on current indicated dividend rates and schedules, Q4 2021 appears set to replace both that quarterly record and set a new annual record for payments in 2021.”
Data points like that indicate it's a favorable environment for dividend exchange traded funds and those good times are expected to continue in 2022 as some market observes believe dividends will represent an increased percentage of returns.
With those tailwinds in minds, here are some dividend ETFs to consider now and in the new year.
WisdomTree Global ex-US Dividend Growth Fund (DNL)
The WisdomTree Global ex-US Dividend Growth Fund (DNL) is a prime example of why investors shouldn't focus solely on domestic dividend payers. After all, payouts around the world are growing this year – a theme DNL readily addresses.
DNL tracks the WisdomTree Global ex-U.S. Quality Dividend Growth Index (WTGDXG). That benchmark goes beyond simply weighting by yield or dividend history. Rather, it focuses on factors such as quality, return on assets, and return on equity – setting DNL investors up for long-term payout growth. The fund recently rebalanced, enhancing its exposure to the aforementioned factors.
“After our rebalance, fundamentals show an increase in quality metrics, as well as higher implied growth, as measured by the earnings retention times ROE. ROA improves from 11.50% to 12.96% and the implied growth rate from 14.66% to 16.16%,” says Alejandro Saltiel, WisdomTree associate research director, in a note.
DNL is up nearly 13% and is beating the MSCI ACWI ex USA Index by more than two-to-one.
VanEck Vectors Pharmaceuticals ETF (PPH)
The VanEck Vectors Pharmaceuticals ETF (PPH) isn't a dedicated dividend ETF, but it is devoted a sector with some of the steadiest, most dependable payouts in the world (PPH includes both domestic and foreign stocks).
“When you think about dividends within healthcare, most of the dividends are going to be coming from biopharma,” says Morningstar analyst Damien Conover. “A lot of these dividends are very secure, and we anticipate the large-cap pharmaceutical stocks to be very secure in their payments going forward.”
PPH has a lot to offer to long-term investors. It's backed by favorable demographic trends (aging populations), pricing power (inflation-fighting capabilities) and the balance sheets necessary to sustain and go payouts for years to come.
WisdomTree U.S. SmallCap Quality Dividend Growth Fund (DGRS)
The WisdomTree U.S. SmallCap Quality Dividend Growth Fund (DGRS) is a small-cap fund, but its status as a credible player on the dividend ETF stage, particularly when it comes to small caps. DGRS yields 1.77%, which is well above the Russell 2000 Index.
However, DGRS isn't a high dividend ETF. Rather, it's comparable to the aforementioned DNL in that it emphasizes quality and other metrics that ensure viability of long-term payouts. Something else to consider: Profitability is a foundational piece in the DGRS methodology and that's not true of many standard small-cap funds.
Looking ahead to next year, DGRS could be a dividend ETF as macro factors place added emphasis on quality.
“The natural concern for 2022 is whether Corporate America can maintain its profit margins in the face of rising labor costs. After all, sometimes it takes the landlord to drop the rent bomb on you before you finally get the courage to ask the boss for a raise,” says Jeff Weniger, WisdomTree’s head of equity strategy. . “A profit margin pinch is coming. When you break apart the often-cited quality smart beta factor, return on equity (ROE), you see that profit margins are a key driver of the metric. Slash margins and you have a problem.”