These 3 Dividend ETFs Are Screaming ‘Sell.’ Should You?

Exchange-traded funds (ETFs) have been around for 32 years in the U.S. And I’ve been scouting and investing in them the entire time. As a result, I’ve developed some biases about the ETF landscape, as well as some pet peeves about investor behavior surrounding them. And dividend ETFs bring a lot of those out.

Case in point, the current status of investing for high dividend yield. To be clear, “high yield” for me is different from investing in dividend stocks for growth, using the dividend as one fundamental signal that the business is stable. It is easier to manipulate earnings within the rules than it is a dividend payment. The former is accounting, timing of revenue recognition, etc. The latter is a payment in cold, hard cash, every quarter, to shareholders.

So in this case, I’m talking about investing in stocks for yield, more like people traditionally invested in bonds. Stocks have more upside potential, but for many investors, especially my fellow retirees, there has been an almost obsessive drive to get paid every quarter, to the tune of 3% or much more, from stocks paying dividends.

That the stock’s price is reduced by the dividend payment is one thing. But the fact that many classic yield stocks have produced little or no return beyond the dividend is, in my view, under-reported and under-appreciated. This has been going on long enough for me to want to call the whole thing out. And look ahead.

There was a time when getting a 3% or 4% dividend yield made sense. But that was when inflation was near zero, and so too were Treasury Bill and Note rates. That’s no longer the case. So if I’m going to pile into stocks that yield less than T-bills, I had better get some price appreciation beyond that. More than a few percentage points per year, ideally.

That has not been happening. Check out this set of three different spins on the high-yield dividend approach. In fact, the Vanguard High Dividend Yield ETF (VYM) and the iShares Core High Dividend (HDV) both have “high dividend” in their name, and the third one, the Invesco Dow Jones Industrial Dividend ETF (DJD), is the Dow 30 ($DOWI), weighted by dividend yield, and excluding the stocks in that index that do not pay a dividend.

Here’s a snapshot comparing them. Note the market-lagging returns this year, but more importantly, the dividend yields toward the bottom of the table. There are many S&P 500 Index ($SPX) stocks within this yield range, but they have just not delivered during this AI-frenzied rally, which just celebrated its third anniversary.

This is not to say that these ETFs have done poorly. However, if we were to look in between the performance periods shown above, we’d see that they have been consistently laggards to the upside, but not a great source of defense when the tech-driven market leaders falter. That tells me they might not be the stable force investors need when that occurs.

This is not new to many investors. The market falls in unison more than it picks winners and losers in a stock rout. Blame the algorithms and index funds… not the investment writers!

These stocks are fundamentally cheap. Those three ETFs all sport trailing price-earnings ratios in the low to mid teens. And their betas are all around 80% of the S&P 500.

But losing less while getting a puny dividend yield does not sit well with me. So I have not been playing along. That doesn’t mean there are not some potential stock winners within dividend ETFs. But as I see it, trying to keep things simple by buying dividend stocks in bulk through a dividend yield ETF is riskier than I can ever remember.

The charts of these are all quite similar, so I’ll use the largest ETF of the trio to represent them. What I see here, in a weekly view, is early signs of trouble. The 20-day moving average is teetering after the recovery from those April lows, and the Percentage Price Oscillator (PPO) looks like it did prior to past declines of significance.

I’ll continue to seek income from U.S. Treasuries, and substitute total return, hedged equity investing, and strategies like option collars.

My message to those who might be getting complacent about that mediocre income payment from dividend ETFs is this: Know what you own, and consider that it might not work as well in the future as it has in the past.

On the date of publication, Rob Isbitts did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com