ETFs pay dividends

Dividend ETF: how useful is it? Two investors - two opinions!

Most Germans don't like stocks! Surveys show this again and again. Fortunately, things look very different with ETFs (Exchange Traded Funds). The exchange-traded index funds are becoming increasingly popular with private investors. And right at the forefront - the Dividend ETF. These ETFs are particularly popular because they distribute the dividend payments. Although there were already distributing ETFs, none that achieve such a high distribution yield and also do not distribute dividend payments on a quarterly basis.

The most popular dividend ETFs are currently:

  1. iShares STOXX Global Select Dividend 100 UCITS ETF (ISIN DE000A0F5UH1, WKN A0F5UH) with a fund volume of almost 1.8 billion euros.
  2. Vanguard FTSE All-World High Dividend Yield UCITS ETF (ISIN IE00B8GKDB10, WKN A1T8FV) with a fund size of over 1.5 billion euros.
  3. Xtrackers STOXX Global Select Dividend 100 SwapUCITS ETF (ISIN LU0292096186, WKN DBX1DG) with a good 700 million euros.
  4. SPDR S&P Global Dividend Aristocrats UCITS ETF (ISIN IE00B9CQXS71, WKN A1T8GD) with over 600 million euros.
  5. UBS ETF (IE) DJ Global Select Dividend UCITS ETF (ISIN: IE00BMP3HG27, WKN: A11471) slightly behind with a good 90 million euros.

How useful is a dividend ETF?

I myself am a big fan of ETFs and mainly rely on this horse for my retirement provision. With exchange-traded funds in particular, I have the opportunity to benefit from global dividend payments with a single investment. My experience report about the very easy build-up of a dividend portfolio is constantly enjoying great popularity.

But let's be honest, among us pastors' daughters: How useful is the dividend ETF actually? Is it really worth investing or wouldn't the money be better off in a classic ETF?

Since I'm a big fan of these products and myself iShares STOXX Global Select Dividend 100 and the Vanguard FTSE All-World High Dividend Yield I am not completely open-minded about saving up in the monthly savings plan.

That's why I got help to clarify this question, "Does a dividend ETF make sense?" But not just anyone, but Dr. Jürgen Nawatzki. Jürgen has been blogging about exchange-traded index funds on ETF-Blog.com for over 5 years and is very familiar with them. Together with Jürgen I will now play little angels and devils. We'll both show you the advantages and disadvantages of dividend ETFs. Because you will almost guess it: [* Spoiler warning *] Unfortunately, the dividend ETFs are not that unreservedly recommendable or useful. [* End spoiler warning *]

In this article, Jürgen and I will shed light on the following topics:

  • The range of ETFs and the presentation of popular dividend indices.
  • Why investing is not so recommendable!
  • But why dividend ETFs are still recommended!
  • Who is the ideal target group and are you one of them?
  • Jump-start for beginners: How can you achieve monthly dividend income with just 3 ETFs and
  • why a monthly savings plan is usually the best plan!

The wide range of dividend ETFs

The interest rate on the savings account is 0%. The official inflation at 2% and nevertheless, we Germans remain a nation of stock-grouches.

Fortunately, there is hope. The number of shareholders increased slightly in 2020 and is at the level of 2001. The year of the dot-com bubble.

The increasing number of shareholders is certainly due to the exchange-traded index funds: the ETFs. And we can warm up a little for a special equity investment: for stocks that offer us investors a high annual payout (called dividend).

The dividend establishes itself as the new interest substitute! A public company can distribute parts of its profits to shareholders. A shareholder receives money without having to sell the shares or parts of them.

An investment in stocks with high dividends is considered solid. Because the dividends are paid by companies that are considered profitable and economically successful.

The financial industry was very happy to take up this interest and combine it with another trend: the trend towards popular exchange-traded index funds, also known as exchange-traded funds and even better known as ETFs.

The investment trend of our time.

An ETF replicates the performance of a stock market index one-to-one. There are numerous stocks in a stock market index. For example, there are 30 shares in the DAX stock market index. In the S&P 500 there are 500. With an investment in an ETF you can diversify very broadly and thus distribute the risk. Not only does that sound easy, it's also one of the reasons ETFs are becoming increasingly popular.

In the marketing departments of the fund companies, the following calculations were made: If ETFs and dividends alone motivate investors, how good would dividend ETFs be for business?

The best and most popular dividend indices on the market

In order to invest in dividend stocks with an ETF, there are essentially four different indices available:

We focus on the largest and most popular indices:

  • Dow Jones Global Select Dividend Index
    This index invests in 100 of the world's largest stocks.
  • FTSE All-World High Dividend Yield Index
    Relies on large and medium-sized companies worldwide that make above-average dividend payments.
  • S&P Global Dividend Aristocrats Index
    Bet on the aristocrats. These are the stocks that have increased dividend payouts annually for at least 10 years.
  • SG Global Quality Income Index
    This index consists of 75 to 125 stocks that have to meet various requirements (e.g. high market capitalization).
  • STOXX Global Select Dividend 100 Index
    Here you can find the world's top 100 companies that have paid constant or increasing dividends over the past 5 years.

There are also numerous smaller dividend indices, mainly from local markets. You may know our DivDAX? However, these indices are often so small that the original purpose of an ETF - the broad diversification - is nullified.

But which of the indices now makes the best dividend ETF?

The "Dow Jones Global Select Dividend" index

The Dow Jones Global Select Dividend Index focuses on companies that meet certain requirements in terms of dividend quality and liquidity. As the name suggests, this is about stocks from the Dow Jones.

The focus here is on the last year in relation to the last five years. The key selection criterion for the security selection is the expected dividend yield. The stocks in the index are weighted according to this return, with only stocks from industrialized countries being included in the index.

The Dow Jones Global Select Dividend in a nutshell

  • 100 dividend stocks from developed countries worldwide.
  • Stock selection is based on dividend quality and trading liquidity.
  • Selection criteria: dividend per share of the previous year> average of the last 5 years and a dividend coverage ratio of 167% or greater (USA and EU) or 125% for other countries.
  • The index adjustment takes place annually in December.
  • Index weighting based on dividend yield.
  • Weight per single title max. 10%.

An ETF recommendation

The right ETF for this is the UBS ETF (IE) DJ Global Select Dividend UCITS ETF (ISIN IE00BMP3HG27, WKN A11471). The DJ Global Select pours out every six months in February and August. The ETF dividend yield was 6.66% in 2019 and 3.23% in the crisis year 2020. What a very high level for a dividend ETF.

The FTSE All-World High Dividend Yield Index

The FTSE All-World High Dividend Yield Index includes the stocks with the highest dividends in both industrialized and emerging countries around the world.

The index aims to track the 50 percent of the equity universe with the highest dividend yield.

With a total of 1,277 companies, this is the world's largest dividend index. Stock selection is based on the expected dividend yield for the next twelve months. The index weighting is based on the market capitalization of the selected companies.

The FTSE All-World High Dividend Yield in a nutshell

  • 1,277 dividend stocks from industrialized and emerging countries worldwide (excluding REITs) (as of March 30, 2018).
  • Stock selection is based on the expected dividend yield for the next 12 months.
  • The index adjustment takes place every six months in March and September.
  • The index weighting is based on market capitalization / free float.

An ETF recommendation

Vanguard supplies the right ETF for this. The Vanguard FTSE All-World High Dividend Yield UCITS ETF (ISIN: IE00B8GKDB10, WKN: A1T8FV). The distribution yield was 3.85% in 2019 and 2.59% in 2020. A great strength of the Vanguard FTSE All-World is the quarterly payout. Vanguard pays dividends in March, June, September and December. You can also find more about the Vanguard here on the blog in my dividend portfolio.

The "S&P Global Dividend Aristocrats" index

The S&P Global Dividend Aristocrats Index is geared towards long-term and stable dividend growth.

A company is only included in this index if it has demonstrated a controlled dividend policy with increasing or steady dividends for at least ten consecutive years.

In addition, clearly defined substance and yield criteria must be met.

Another special feature of this index is that it can contain not only stocks from industrialized countries around the world, but also from emerging countries.

The S&P Global Dividend Aristocrats in a nutshell

  • approx. 100 dividend stocks from the S&P Global Broad Market Index (BMI).
  • The index adjustment takes place annually in January.
  • Stock selection is based on historical dividend yield.
  • Selection criteria: Controlled dividend policy with increasing or steady dividends for at least ten consecutive years.
  • The index weighting is based on the dividend yield.
  • Weight per individual title max. 3%, per sector / country max. 25%, per country max. 20 titles.

An ETF recommendation:

The matching ETF for this index is the SPDR S&P Global Dividend Aristocrats UCITS ETF (ISIN: IE00B9CQXS71, WKN: A1T8GD). This dividend ETF also pays quarterly. Always in February, May, August and November. In 2019 the dividend yield was 3.80% and in the crisis year 2020 it was a yield of 2.97%.

The “SG Global Quality Income” index

The SG Global Quality Income Index relies on comprehensive quality criteria when selecting stocks.

Among the global dividend indices examined, this is the only index that takes into account the expected dividend yield based on an analyst consensus. This must be at least 4 percent or more.

Another special feature is the equal weighting of all selected dividend stocks in the index. Financial stocks are excluded from this index.

The SG Global Quality Income in a nutshell

  • 25 to 75 dividend stocks from a universe of 26 industrialized countries worldwide (excluding financial stocks).
  • Stock selection is based on the expected dividend yield.
  • Selection criteria: 9 quality factors (profitability, creditworthiness and operational efficiency), positive balance sheet risk assessment, expected dividend yield (at least 4% or 125% of the index universe).
  • Special feature: equal weighting of all stocks in the index.
  • The index is adjusted quarterly.

An ETF recommendation:

For this index there is the Lyxor SG Global Quality Income NTR UCITS ETF (ISIN: LU0832436512, WKN: LYX0PP). This pours out every six months in June and December. The distribution yield was 5.17% in 2019 and 3.57% in 2020.

The “STOXX® Global Select Dividend 100” index

The STOXX Global Select Dividend 100 Index comprises a selection of companies that meet the requirements for very high dividend quality.

The global index is made up of the three regional indices STOXX Europe Select Dividend 30 Index, STOXX North America Select Dividend 40 Index and the STOXX Asia / Pacific Select Dividend 30 Index.

Stocks are selected in the sub-regions on the basis of the historical dividend yield and are then weighted in the index according to the expected dividend yield.

The STOXX® Global Select Dividend 100 in a nutshell

  • 100 dividend stocks from the STOXX Global 1800.
  • The index contains 40 stocks from North America and 30 stocks each from Europe and Asia-Pacific.
  • The index adjustment takes place quarterly.
  • Stock selection is based on historical dividend yield.
  • Selection criteria: positive dividend growth over 5 years, dividend payment in 4 of the last 5 years, max. 60% payout ratio.
  • The index weighting is based on the expected dividend yield.

An ETF recommendation:

Here iShares delivers with the STOXX Global Select Dividend 100 UCITS ETF (ISIN: DE000A0F5UH1, WKN: A0F5UH) the right ETF. This achieved a distribution yield of 4.78% in 2019 and 3.54% in 2020. The dividends are distributed quarterly in January, April, July and October. The STOXX Global Select from iShares and the Vanguard FTSE All-World High Dividend Yield are the only two ETFs that have a fund volume of over 1 billion euros.

So what's the best dividend ETF?

Now you've got a comprehensive look at the most popular dividend indices. All indices have their strengths. But which one should you bet on now? Which one is that now best index and makes the best dividend ETF? If you are already starting a monthly savings plan, then you ultimately want to bet on the best horse.

The following table shows, among other things. the performance of 13 ETFs on global dividend indices in comparison.

All performance information is at the end of the month and includes distributions. The companies are sorted in descending order according to the amount of the fund volume:

Juergens Cons: Dividend ETFs do NOT make sense!

What is good business for the financial sector does not necessarily have to be a worthwhile investment for private investors. If the classic ETFs on the MSCI Word have an expense ratio (TER) of 0.20% and below, the dividend ETF industry does well with double the fees. Even if we are still talking about a very low TER, it is significantly higher.

That is why Quirin Privatbank has checked what dividend ETFs are really good for in practice.

To this end, the bank compared the performance of frequently used dividend barometers with the performance of well-known stock indices.

Short: The bank checked whether dividend ETFs are really that great.

The MSCI World share barometer, which shows the performance of the most important shares from 23 industrialized countries, had to measure itself against the associated dividend index, the MSCI World High Dividend.

This comparison is based on a long period of time: the experts looked at the performance over the past ten years.

The sometimes offensive advertising for dividend funds gives the impression that dividend investments achieve a better performance than conventional investments in indices.

Unfortunately the opposite is the case! The results of the investigation are devastating for all investors who invest their money in dividend ETFs.

Classic ETFs do better than their dividend counterparts in almost every category. An investment does not make sense from this point of view!

The performance of dividend indices lags behind that of general market indices.

Dr. Jürgen Nawatzki

In Germany, the difference is admittedly rather small:

In the past ten years, the Dax had a return of 5.8 percent on an annual average, the Div-Dax is only slightly behind with 5.6 percent.

The difference in the MSCI World Index is clearer.

The index achieved an average return of 8.8 percent over the past ten years, while the MSCI World High Dividend only achieved 6.9 percent - and that's a respectable difference on the stock market.

In Europe, too, the gap is enormous:

The Euro Stoxx 50 has not achieved a great performance in the past ten years:

But with an average of 2.3 percent per year, it still leads the dividend index Euro Stoxx Select Dividend by a full 1.5 percentage points.

How can these differences be explained?

Why are the reasons for the bad performance?

First of all, dividend indices have a fundamental construction problem:

They always contain fewer stock corporations than in the associated, better-known stock barometers.

The Dax has 30 members, but the Div-Dax only 15.

And the MSCI World Index has more than 1,600 public companies, while the MSCI World High Dividend only comes to around 280.

And, as the name suggests, the Euro Stoxx 50 has 50 titles, while the Euro Stoxx Select Dividend currently has 30 titles.

So investors invest in fewer stocks each time they buy dividend ETFs - and their money is therefore less diversified.

The dividend alone is not a return booster

However, the fact that dividends make up a significant proportion of long-term stock performance does not mean that stocks with particularly high dividend yields also generate above-average performance.

And when companies with high dividend yields are included in the dividend indices, this can also be problematic:

Because the dividend yield stands for the ratio of the most recently paid dividend of a company to its share price.

The dangerous thing about it, however, is that the dividend yield can be high even if the share price of a company falls dramatically, but the company keeps the dividend at a consistently high level.

Some index providers try to get around this by only including companies that increase dividends slightly over the years and whose share prices are subject to only minor fluctuations.

But even such barometers called dividend aristocrats are not always convincing.

Jürgen's conclusion is therefore identical to that of Quirin Privatbank: “Customers are therefore generally advised not to invest in dividend ETFs„.

Sebastians Pro: Investing in dividend ETFs can make sense!

The performance of dividend ETFs lag behind the performance. That is a fact and the Quirin Privatbank clearly explained it to us. I cannot refute this investigation or contradict it.

Still, I would Do not categorically reject dividend ETFs. Because, as is so often the case in life, this coin has two sides.

Why?

Because many investors are not necessarily looking for the highest return. Not every investor is out for maximized wealth accumulation. There are also moorings that are looking for one predictable and solid monthly income. Passive income is the magic word and this is exactly where these dividend ETFs come into play. Because the dividend is distributed quarterly and is therefore an ideal component.

What the classic ETFs often do not have is precisely this quarterly payout, because the classics only pay out once a year, if at all. In addition, the distribution yield of classic index funds is well below the yield of specialized ETFs. And in my opinion that is what makes the investment so interesting.

The target group - will you be there?

It therefore depends on which target group you belong to. Because the investment is only a good tip for you if you are in the right target group.

  1. Target group wants wealth accumulation
    Those who strive to build up their wealth are certainly better off with the classic products on the MSCI World, EM or STOXX. When it comes to building up assets, it is not the distribution that counts, but the return and retention. For this target group, a small cap ETF that relies on small and medium-sized companies can certainly also be a supplement.
  2. The target group wants to achieve a predictable and regular passive income
    However, those who belong to the second target group can live well with the lower return if another goal is achieved. With passive income, the goal is to achieve a reasonably predictable monthly income. Of course, the dividend payments fluctuate and can be lower or higher, but you know that you will receive payments. There are also dividend forecasts for every ETF that you can work with and plan with.

Receive dividends every month - three ETFs are enough!

Do you want monthly dividend payments? But you don't want to go to the trouble of building up your own stock portfolio with dividend aristocrats? Then we finally have a finished kit for you.

If you are alone in the two ETFs presented above:

  • iShares STOXX Global Select Dividend 100 UCITS ETF (ISIN DE000A0F5UH1, WKN A0F5UH)
  • SPDR S&P Global Dividend Aristocrats UCITS ETF (ISIN IE00B9CQXS71, WKN A1T8GD)

If you invest, you will already receive a dividend in January, February, April, May, July, August, October and November. Ideal for everyone who wants to build a regular passive income with dividends with savings plans.

For 2020, the dividend yield of the two ETFs from iShares and SPDR was 3.54% and 2.98%, despite the corona and pandemic conditions. For 2021, the projections for the dividend yield of the two are 3.45% and 3.41%.

With these figures it becomes clear again why the dividends are now more often described as "the new interest rate". So I'm going to keep my own monthly savings plans running.

But if you really want to achieve a distribution every single month of the year, you still have to cover the months of March, June, September and December.

For the third dividend ETF you are even spoiled for choice.

The agony of choice of the markets

The first option is this Invesco FTSE Emerging Markets High Dividend Low Volatility ETF (ISIN: IE00BYYXBF44, WKN: A2AHZU). As the name suggests, the focus here is on developing countries. In addition, the ETF covers the desired months of March, June, September and December 100%. The ETF was also able to convince extremely positively in terms of the distribution yield with 3.35% in 2020 (even at 5.34% in 2019).

Alternatively, I can give you my personal favorite Vanguard FTSE All-World High Dividend Yield (ISIN: IE00B8GKDB10, WKN: A1T8FV) recommend. This dividend ETF also pays out in March, June, September and December. So it also fits the strategy 100%. The Vanguard FTSE is noticeably behind the Invesco ETF in terms of dividend yield of 2.60%.

If you compare the returns of the two ETFS, both are close to each other. The Vanguard is up 31.9% and the Invesco is 30.0%.

The Vanguard scores with the lower TER of 0.29% to 0.49%.

In my personal opinion, choosing between the Invesco and the Vanguard is easy. If you prefer to be on the safe side and want to rely on the largest companies worldwide, you should take the Vanguard. Anyone who is more risky and / or is specifically looking for emerging markets will turn to Invesco.

How you can start: ideally with a monthly savings plan!

ETFs are perfect for a savings plan. Because

  • Savings plans are often free
  • Possible from 25 euros
  • By saving monthly, you make optimal use of the cost-average effect.

The cost-average effect in particular should not be underestimated in savings plans. By regularly buying ETF shares, you can make the most of falling prices. Because if the price falls, you receive more shares, which of course can optimize the return when the price rises.

Need the right ETF portfolio?

No matter whether you want to buy stocks or ETFs or save with a monthly savings plan. You need a good and cheap broker.

If you want to build up the dividend ETF portfolio presented above in order to receive monthly dividend payments, then you need the following three ETFs:

  • iShares STOXX Global Select Dividend 100 UCITS ETF (ISIN DE000A0F5UH1, WKN A0F5UH)
  • SPDR S&P Global Dividend Aristocrats UCITS ETF (ISIN IE00B9CQXS71, WKN A1T8GD)
  • Invesco FTSE Emerging Markets High Dividend Low Volatility ETF(ISIN: IE00BYYXBF44, WKN: A2AHZU)

Now you have to check where you can save these ETFs inexpensively with a savings plan. Lo and behold, there is currently only one broker who makes all three of the ETFs you want available with a free savings plan: Scalable Capital.

Scalable Capital is an established broker and asset manager that has been in the market since 2014. The team manages assets of over 4 billion euros.

At Scalable Capital you can save over 1500 ETFs free of charge. And that from 25 euros!

The bottom line

Jürgen and I have shown you that dividend ETFs are not convincing purely in terms of performance. Classic index ETFs do better here.

As is so often the case, it depends on your goals. The return alone is often not decisive. If you are one of those investors for whom a solid and predictable monthly income is important, then you should take a look at dividend ETFs. Even if you want to work with monthly savings plans.

With just three ETFs, you can combine quarterly distributions in such a way that you achieve monthly dividend payments. In 2019 you could have achieved a distribution yield of a good 5%.

So, dividend ETFs are not useful for traditional wealth accumulation. Anyone who wants to achieve passive income and monthly income will certainly be happy here.

This article is co-authored with Dr. Jürgen Nawatzki emerged. He is a business graduate and specialist journalist (FJS). After completing his doctorate, he worked as a financial advisor at MLP for several years before he discovered his love for writing and became an author and financial blogger on etf-blog.com.


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