Many analysts fear the spread of the hyper-contagious Delta variant of COVID-19 in several countries could stall global economic growth. This, along with a decline in consumer sentiment and rising inflation, has of late been driving significant volatility in the stock market. The consumer price index increased 5.4% in June, its largest year-over-year jump since August 2008.
Against this backdrop, investors are turning to dividend-yielding stocks to hedge their portfolios against market volatility by ensuring a steady income stream. However, because betting on dividend-paying stocks can be risky too, because many of them could suffer a correction with the broader market, it could be wise to invest in dividend-paying ETFs to ensure broader portfolio diversification at lower risk.
Considering these factors, we think dividend-paying ETFs Vanguard Dividend Appreciation Index Fund ETF Shares (VIG), iShares iBoxx $ High Yield Corporate Bond ETF (HYG), SPDR S&P Dividend ETF (SDY), and Utilities Select Sector SPDR Fund (XLU) are solid bets now.
Vanguard Dividend Appreciation Index Fund ETF Shares (VIG)
VIG is an exchange-traded fund launched and managed by The Vanguard Group, Inc. The fund invests in dividend-paying, growth, and value stocks of companies across diversified market capitalization levels. It seeks to track the Nasdaq US Dividend Achievers Select Index performance.
With $61.09 billion in AUM, VIG’s top holding is Microsoft Corporation (MSFT), which has a 4.19% weighting in the fund, followed by JPMorgan Chase & Co. (JPM) at 3.79% and Johnson & Johnson (JNJ) at 3.67%. It has a 0.06% expense ratio of 0.06%, which is lower than the 0.37% category average. VIG pays a $2.41 annual dividend, which yields 1.55% at the prevailing fund price. The ETF’s average four-year dividend yield stands at 1.83%. VIG has gained 26.4% over the past year and 17.4% over the past nine months.
VIG’s POWR Ratings are consistent with its growth outlook. It has an overall A rating, which equates to Strong Buy in our proprietary rating system. It also has an A for Buy & Hold Grade, Trade Grade, and Peer Grade. Get all the VIG ratings here.
VIG is ranked #5 of 261 ETFs in the A-rated Large Cap Blend ETFs group.
iShares iBoxx $ High Yield Corporate Bond ETF (HYG)
Launched by BlackRock, Inc. (BLK), HYG is an exchange-traded fund managed by BlackRock Fund Advisors. It invests in U.S.-dollar-denominated high yield corporate bonds with a maturity of at least one year and no more than 15 years and a sub-investment grade rating from Fitch, Moody's, or S&P. The fund seeks to track the performance of the Markit iBoxx USD Liquid High Yield Index.
BlackRock Cash Funds Treasury SL Agency Shares have a 0.69% weighting in the fund as its top holding, followed by corporate bonds at 0.47%, and Sprint Corp. 7.875% 15-SEP-2023 bonds at 0.41%. The fund has $19.69 billion in AUM. Its 0.49% expense ratio compares to the 0.47% category average. HYG pays $3.89 annually in dividends to its investors, which yields 4.47%. Its average four-year dividend yield stands at 5.25%. Over the past year, the fund has gained 4.3%. It has gained 3.3% over the past nine months.
It’s no surprise that HYG has an overall A rating, which equates to Strong Buy in our proprietary rating system. It has an A for Trade Grade and Buy & Hold Grade.
Click here to access HYG’s Peer Grade also. HYG is ranked #1 of 54 ETFs in the A-rated High Yield Bond ETFs group.
SPDR S&P Dividend ETF (SDY)
SDY is an exchange-traded fund launched by State Street Global Advisors, Inc. The fund invests in dividend-paying stocks and the stocks of companies operating across diversified sectors. It seeks to track the performance of the S&P High Yield Dividend Aristocrats Index and the S&P 500 Index.
SDY has $ 19.68 billion in AUM. Its top holdings include Exxon Mobil Corporation (XOM) with a 2.62% weighting in the fund, AT&T Inc. (T) at 2.46%, and South Jersey Industries, Inc. (SJI) with 2.19%. The fund’s 0.35% expense ratio compares favorably to the0.52% category average.
The fund pays a $3.24 annual dividend of $3.24, which yields 2.7% at the prevailing share price. Its average four-year dividend yield stands at 3.32%. The fund has gained 28.2% over the past year and generated 25.2% returns over the past nine months.
SDY’s strong fundamentals are reflected in its POWR Ratings. It has an overall A rating, which equates to Strong Buy in our proprietary rating system. It also has an A grade for Trade and Buy & Hold components.
SDY is ranked #7 of 84 in the A-rated Large Cap Value ETFs group. In addition to this, one can access SDY’s Peer Grade here.
Utilities Select Sector SPDR Fund (XLU)
XLU is an exchange-traded fund managed by SSGA Funds Management, Inc. It invests in the stocks of companies that operate across utility sectors and in growth and value stocks of companies across diversified market capitalizations. The fund seeks to track the performance of the Utilities Select Sector Index and the S&P 500 Index.
The fund’s top holdings include NextEra Energy, Inc. (NEE) with a 16.35% weighting, Duke Energy Corporation (DUK) at 8.68%, and Southern Company (SO) with 7.20%. It has $11.83 billion in AUM, and its 0.12% expense ratio compares to the 0.43% category average.
XLU pays a $198 annual dividend of $1.98, which yields 3.03% on the prevailing fund price. Its average four-year dividend yield stands at 3.23%. The ETF has gained 8.3% over the past year and nearly 4% year-to-date.
XLU’s POWR Ratings reflect its solid prospects. It has an overall A rating, which equates to Strong Buy in our proprietary rating system. It has an A grade for Trade, Peer, and Buy & Hold components.
Click here to see all the XLU ratings. XLU is ranked #1 of 13 in the B-rated Utility ETFs group.
VIG shares were trading at $157.12 per share on Tuesday afternoon, up $2.09 (+1.35%). Year-to-date, VIG has gained 12.20%, versus a 16.05% rise in the benchmark S&P 500 index during the same period.
About the Author: Nimesh Jaiswal
Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.
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