4 Dividend-Paying ETFs to Scoop up for 2021

Amid surging coronavirus infections and rising uncertainties over the second stimulus package, many investors are shifting some of their investments to dividend-paying stocks to hedge their portfolio against a market crash. Buying dividend stocks that also have the potential to move higher can be a great way to grow portfolio value while enjoying recurring cash flow.

While the pandemic forced many dividend-paying companies to cut or suspend their dividend payments, some companies are increasingly rewarding their shareholders. A total of 216 companies have increased their dividends in 2020, according to S&P Dow Jones Indices. In the words of Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA Research, “In the third quarter, three times as many companies initiated or raised their dividends than those that took preventative actions in the first quarter.”

While dividend investing is perhaps one of the best options now, betting on individual stocks could be risky at this moment. Exchange-traded funds (ETFs) help you mitigate this risk as they hold a broad and diversified exposure at minimal operating costs.

Investing in high-dividend yielding ETFs is very tricky as they might have depressed prices leading to a trap. Along with offering solid dividend income, the following ETFs are well-positioned to soar in the upcoming quarters: SPDR S&P 500 ETF Trust (SPY), iShares iBoxx $ High Yield Corporate Bonds (HYG), SPDR S&P Dividend ETF (SDY), and SPDR Bloomberg Barclays High Yield Bond ETF (JNK).

SPDR S&P 500 ETF Trust (SPY)

SPY is the best-recognized, oldest, and most heavily-traded US-listed ETFs. The investment seeks to provide investment results that correspond to the performance of the S&P 500 Index. The S&P 500 Index is a diversified large-cap US index that holds companies across all eleven GICS sectors. The Trust holds a portfolio of the stocks corresponding to the weight of such stock in the index.

The ETF has an impressive record of paying quarterly dividends. The most recent dividend declared by SPY was $1.34 in September. The fund has grown its dividend at a CAGR of 7.9% in the past five years. While the four-year average dividend yield for SPY is 1.87%, the ETF’s annual dividend cumulates to $5.68, translating into a dividend yield of 1.69%.

SPY has $285.93 billion as AUM and an expense ratio of 0.09%. The ETF has an MSCI ESG Fund Rating of A based on a score of 6.70 out of 10.

The fund currently holds 506 companies with the information technology sector naturally leading the way, with nearly 28.2% weightage. The ETF also has an exposure of 14.2% and 11.6% to Healthcare and Consumer Discretionary sectors, respectively. The top 3 holdings of the fund are Apple Inc (AAPL), Microsoft Corporation (MSFT), and Amazon.com Inc. (AMZN), with weights of 6.4%, 5.6%, and 4.7%, respectively.

SPY closed yesterday’s trading session at $343.54, with a year-to-date gain of 8.8%. The ETF has witnessed net inflows of $741.17 million in the past month. The ETF is presently trading just 4.2% below its all-time high of $358.75.

How does SPY stack up for the POWR Ratings?

A for Trade Grade

B for Buy & Hold Grade

A for Industry Rank

B for Overall POWR Rating.

It is ranked #31 out of 204 ETFs in the Large Cap Blend ETFs group.

iShares iBoxx $ High Yield Corporate Bond ETF (HYG)

HYG aims to mirror the results of an index composed of US dollar-denominated, high yield liquid corporate bonds. HYG is a highly liquid ETF that monitors the junk bond market. HYG is an anchor tenant in the ETF bond market and seeks to track the investment results of the Markit iBoxx USD Liquid High Yield Index. Although HYG does have international involvement, most of its assets are in the United States.

HYG pays dividends every month and has recently made a pay-out of $0.36 on November 2nd, increasing its dividend by 0.6% sequentially. While the four-year average dividend yield for the ETF is 5.45%, the current annual dividend of $4.22 translates into a 5.04% yield.

The fund has $23.73 billion as AUM and an expense ratio of 0.49%. The ETF has an MSCI ESG Fund Rating of BB based on a score of 3.03 out of 10.

The fund currently holds 1,214 bonds with a maximum exposure of 55.5% to the BB-rated bonds followed by a 32.5% exposure to B rated bonds. 32.5% of its holdings range between 3 to 5 years of maturity. The top 3 holdings of the fund are BlackRock Cash Funds Treasury SL (BLK), Altice France SA 7.375% (France) 144A, and Sprint Corp (S) with the weights of 1.8%, 0.53%, and 0.48%, respectively.

HYG closed yesterday’s trading session at $85.23, gaining 1.8% year-to-date. The ETF has witnessed a net inflow of $2.93 billion in the past six months and is up 9.5% in the same period. The ETF is presently trading just 3.7% below its all-time high of $88.53.

HYG’s POWR Ratings reflect a promising outlook. It has an overall rating of “Strong Buy” with an “A” for Trade Grade, Buy & Hold Grade, and Industry Rank. Among the 54 ETFs in the High Yield Bond ETFs group, it’s ranked #1.

SPDR S&P Dividend ETF (SDY)

The investment objective of SDY is to provide investment results that correspond to the performance of the S&P High Yield Dividend Aristocrats Index. The index is designed to measure the performance of the highest dividend yielding S&P Composite 1500 Index constituents that have followed a managed dividends policy of consistently increasing dividends every year for at least 20 consecutive years.

SDY paid a dividend of $0.69 in the second quarter, increasing its payout by 0.9% sequentially. The fund has grown its dividend at an average rate of 8.1% in the past five years. While the four-year average dividend yield for the ETF is 3.53%, the current annual dividend of $2.83 translates into a 2.92% yield.

SDY has $15.14 billion as AUM and an expense ratio of 0.35%. The ETF has an MSCI ESG Fund Rating of A based on a score of 6.36 out of 10.

The ETF has a 23.1% weightage to the financial sector, followed by an exposure of 19.8% and 14.9% to the Industrial and consumer staples sector, respectively. The top 3 of 118 holdings of the fund are Exxon Mobil Corp (XOM), AT&T Inc (T), and Chevron Corporation (CVX) with weights of 3.4%, 2.4% and 2.4%, respectively.

SDY has gained 10.3% in the past six months to close yesterday’s trading session at $95.07. The ETF is presently trading 12.6% below its 52-week high of $108.81.

SDY is rated “Buy” in our POWR Ratings system. It holds a “B” in Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank. It is ranked #18 out of 85 ETFs in the Large Cap Value ETFs group.

SPDR Bloomberg Barclays High Yield Bond ETF (JNK)

JNK offers exposure to the junk bond space by investing in an index which holds middle rated bonds with at least one year to maturity and has $600 million or more in outstanding face value. The fund tracks the market-weighted Bloomberg Barclays High Yield Very Liquid Index of highly liquid, high-yield, US dollar-denominated corporate bonds.

JNK pays a dividend every month and has recently made a pay-out of $0.45 on November 2nd. It pays an annual dividend of $5.67, which yields 5.43% on the prevailing price. JNK’s 4-year average dividend yield is 6%. The trailing twelve months dividend growth rate for the fund is 4.1%.

IBB has $11.64 billion as AUM and an expense ratio of 0.4%. The ETF has an MSCI ESG Fund Rating of BB based on a score of 3.07 out of 10.

The fund currently holds 1,088 bonds with the maximum exposure of 20.7% to the Corporate – Consumer Cyclical sector followed by a 17.2% and 15.3% exposure to the Communications and Consumer Non-cyclical sectors, respectively. 36.6% of its holdings range between 5 to 7 years of maturity with the maximum exposure of 51.5% to the BB-rated bonds. The top 3 holdings of the fund are Altice France SA 7.38% bond, TransDigm, Inc. 6.25% bond (TDG), Carnival Corporation 11.5% bond (CCL), with weights 0.57%, 0.49% and 0.46%, respectively.

JNK closed yesterday’s trading session at $106.04, gaining 1.3% year-to-date. The ETF has witnessed net inflows of $768.43 million in the past six months and is up 10.7% in the same period. The ETF is presently trading 3.9% below its all-time high of $110.33.

It’s no surprise that JNK is rated a “Strong Buy” in our POWR Ratings system. It also has an “A” for Trade Grade, Buy & Hold Grade and Industry Rank, and a “B” for Peer Grade. Among the 54 ETFs in the High Yield Bond ETFs group, it’s ranked #2.

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SPY shares were trading at $351.07 per share on Thursday afternoon, up $7.53 (+2.19%). Year-to-date, SPY has gained 10.64%, versus a % rise in the benchmark S&P 500 index during the same period.

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies.

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