What constitutes a good high-dividend strategy for passive funds? Today, income investors are increasingly attracted to exchange-traded funds (ETFs) because they're easy to buy, transparent, and cheap.
In selecting ETFs, income investors should also look for stable payouts and constant dividend growth, rather than the highest yield. This lessens the risk of falling into a "dividend trap," which is when a high yield masks problems such as high debt and low profitability, and a dividend is eventually cut or scrapped.
Dividend ETFs try to avoid this by balancing their yield from current income with the portfolio's long-term capital growth. However, strategies may vary from fund to fund, and it's worth understanding how often the portfolio gets rebalanced and what index the ETF is replicating.
Below we list five income ETFs with a Morningstar Medalist Rating of Gold. We've highlighted commentary by our team of passive strategies analysts.
• Fidelity US Quality Income ETF (FUSD)
• iShares MSCI Europe QualityDividend ESG UCITS ETF (QDVX)
• Vanguard FTSE All-World High Dividend Yield UCITS ETF (VHYL)
• Fidelity Europe Quality Income UCITS ETF (FEUI)
• SPDR® S&P® U.S. Dividend Aristocrats ESG UCITS ETF (UEDV)
Passive ETFs with Morningstar's top rating of Gold are expected to deliver alpha that exceeds the lesser of the category median net alpha, or zero, over the long term.
Five Gold-Rated Dividend ETFs
Fidelity US Quality Income ETF (FUSD)
• Morningstar Medalist Rating: Gold
• Morningstar Category: US Equity Income
• Ongoing Charge: 0.25%
• 12-Month Yield: 1.91%
The strategy's sensible investment philosophy merits a High Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained an overweight in quality exposure and volatility exposure compared with category peers. A high quality exposure means holding stocks that are consistently profitable, growing, and have solid balance sheets. And high volatility exposure is rooted in stocks that havea higher standard deviation of returns. The strategy's management team earns an Above Average People Pillar rating. The strategy's parent organisation earns the firm an Above Average Parent Pillar ratin. (People Pillar and Parent Pillar ratings for this strategy are indirectly assigned by a Morningstar analyst rather than algorithmically derived.)
iShares MSCI Europe QualityDividend ESG UCITS ETF (QDVX)
• Morningstar Medalist Rating: Gold
• Morningstar Category: Europe Equity Income
• Ongoing Charge: 0.28%
• 12-Month Yield: 3.19%
The strategy's sensible investment philosophy merits a High Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained an overweight in liquidity exposure and an underweight in momentum exposure compared with category peers. High liquidity exposure is attributed to stocks with a high trading volume, lending managers more flexibility. And low momentum exposure is rooted in holding stocks that are not currently on a winning streak and instead holding those that managers Believe are undervalued. The strategy's management team earns an Above Average People Pillar rating. The strategy's parent organisation earns the firm an Above Average Parent Pillar rating. People Pillar and ParentPillar ratings for this strategy are indirectly assigned by a Morningstar analyst rather than algorithmically derived.
Vanguard FTSE All-World High Dividend Yield UCITS ETF (VHYL)
• Morningstar Medalist Rating: Gold
• Morningstar Category: Global Equity Income
• Ongoing Charge: 0.29%
• 12-Month Yield: 3.05%
The strategy's investment process inspires confidence and earns a High Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained a significant underweight position in quality exposure and an overweight in yield exposure compared with category peers. Low quality exposure is attributed to stocks with higher financial leverage and lower profitability. And a high yield exposure is rooted in holding high dividend-paying or buyback stocks. The strategy's management team earns an AboveAverage People Pillar rating. The strategy's parent organisation earns the firm a High Parent Pillar rating. People Pillar and Parent Pillar ratings for this strategy are indirectly assigned by a Morningstar analyst rather than algorithmically derived. Please see the notes following each pillar section for more details. The details of assigning methods can be found in each pillar section.
Fidelity Europe Quality Income UCITS ETF (FEUI)
• Morningstar Medalist Rating: Gold
• Morningstar Category: Europe Equity Income
• Ongoing Charge: 0.30%
• 12-Month Yield: 3.41%
The strategy's sensible investment philosophy merits a High Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained an underweight position in liquidity exposure and an overweight in quality exposure compared with category peers. Low liquidity risk exposure is attributed to stocks with a low trading volume, limiting managers' flexibility. And a high quality exposure is rooted in holding stocks that are consistently profitable, growing, and have solid balance sheets. The strategy's management team earns an Above Average People Pillar rating. The strategy's parent organisation earns the firm an Above Average Parent Pillar rating. People Pillar and Parent Pillar ratings for this strategy are indirectly assigned by a Morningstar analyst rather than algorithmically derived. Please see the notes following each pillar section for more details. The details of assigning methods can be found in each pillar section.
SPDR S&P US Dividend Aristocrats ESG UCITS ETF (UEDV)
• Morningstar Medalist Rating: Gold
• Morningstar Category: US Equity Income
• OngoingCharge: 0.35%
• 12-Month Yield: 2.02%
The strategy's investment process inspires confidence and earns an Above Average Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained an overweight in liquidity exposure and an underweight in quality exposure compared with category peers. High liquidity exposure is attributed to stocks with a high trading volume, lending managers more flexibility. And a low quality exposure is rooted in stocks with higher financial leverage and lower profitability. The strategy's management team earns an Above Average People Pillar rating. The strategy's parent organisation earns the firm an Above Average Parent Pillar rating. People Pillar and Parent Pillar ratings for this strategy are indirectly assigned by a Morningstar analyst rather than algorithmically derived. Please see the notes following each pillar section for more details. The details of assigning methods can be found in each pillar section.
