High-dividend ETFs are just about the only diversified funds up this year. And most of them agree on the S&P 500 stocks you need to own.
Seven S&P 500 high-dividend stocks — including AbbVie, Exxon Mobil and Philip Morris — are top 10 holdings of at least half of the top five diversified ETFs this year, says an Investor's Business Daily analysis of data from S&P Global Market Intelligence and ETF.com.
The popularity of S&P 500 dividends and high-yielding dividend ETFs has defined much of the market's action this year. And these are the kinds of stocks that investors — and leading ETFs — are focused on.
"The outperformance of dividend payers in 2022 is no fluke," said Morningstar Indexes strategist Dan Lefkovitz. "Going back through history, there have been plenty of periods like 2004-2006, when rates rose but dividend stocks dramatically outperformed growth stocks."
Looking At Dividend ETFs
The dominance of dividend-paying ETFs is impossible to ignore. Nine out of the top 10 diversified ETFs this year are all focused on dividends, says Morningstar Direct. They're also among the few ETFs that are up this year. And that's an impressive feat in a year thus far that the S&P 500 has delivered a 12.9% loss.
High-dividend ETFs are capturing the scramble by investors to gain income without relying solely on bond ETFs, says Todd Rosenbluth, head of research at VettaFi. Investors know that bond ETFs fall in price as the Federal Reserve raises short-term interest rates. Dividend ETFs offer another way.
"Given the rising rate environment that has caused bond funds to decline in value, investors have been searching for alternative ways to obtain income," Rosenbluth said. "Dividend-paying stocks provide a steady stream of cash to shareholders, while providing upside potential through share appreciation."
Take a look at the top-performing diversified ETF so far this year: Invesco S&P Ultra Dividend Revenue. The ETF has returned 9.3%. The $886-million-in-assets ETF does it by owning 60 of the highest-yielding stocks in proportion to their revenue. Exxon Mobil and Chevron are two of the ETF's largest 10 holdings held in common with other top diversified funds. Chevron is nearly 4.9% of the ETF's portfolio, while Exxon Mobil is 4.8%.
And it's easy to understand their allure. Chevron shares are up nearly 60% this year, on top of paying a dividend yield of 3.1%. And then there's Exxon Mobil, which is up nearly 86% on top of a dividend of 3.3%. Such gains aren't missed by most dividend ETFs.
Dividend ETFs Find Favorite S&P 500 Stocks
Exxon Mobil is close to being a must-own by dividend ETFs. It's also a top 10 holding of three of the other top-performing diversified ETFs, as it's now the No. 9 most valuable stock in the SPDR S&P 500 Trust. Those ETFs include WisdomTree US High Dividend, iShares Core High Dividend and First Trust Morningstar Dividend Leaders.
Chevron, too, shows up in the top 10 holdings of two other dividend ETFs: WisdomTree US High Dividend and iShares Core High Dividend. And that's despite it only ranking fifteenth in the S&P 500.
Energy, though, isn't the only favorite among dividend ETFs. Philip Morris is as famous for its 5.2% dividend yield as its family of cigarette products like Marlboro. It's held by four of the top five top diversified ETFs. And then there's health care company AbbVie, which is held in large amounts by three of the top funds and has a 3.8% dividend yield.
Don't assume, though, that popularity and a big dividend translate into gains. Verizon is a top holding of four of the top five diversified funds, too, thanks to its 6.8% dividend yield. But it's down 25% this year.
Don't expect ETF investors to lose their appetite for dividends anytime soon, Rosenbluth says. "We expect investors to turn to dividend ETFs for capital appreciation potential more than to support income needs in 2023 as the Federal Reserve slows down its rate-hiking program and bond funds offer a more competitive income alternative," he said.
Must-Own Dividend Stocks
Top 10 holdings by most of the five best-performing diversified ETFs this year
| Company | Symbol | Yield | YTD ch. |
|---|---|---|---|
| Exxon Mobil | 3.3% | 86.5% | |
| Chevron | 3.1 | 58.9 | |
| AbbVie | 3.8 | 17.9 | |
| International Business Machines | 4.5 | 11.5 | |
| Philip Morris International | 5.2 | 2.1 | |
| Altria Group | 8.4 | -4.7 | |
| Verizon | 6.8 | -24.7 |
Sources: S&P Global Market Intelligence, IBD
Follow Matt Krantz on Twitter @mattkrantz
