2020 will be remembered as one of the wildest years in recent memory, both from a financial markets standpoint and life in general. 2021, however, could be a different story. If the markets keep betting that a COVID vaccine will be available sometime in 2021 and the economy is on track for a recovery, it could be a big year for dividend ETFs.
Why? In an economic rebound, value and cyclical stocks tend to outperform - two areas of the market that are often overweight in dividend funds. Financials, energy and industrials could perform particularly well and that would provide a big boost to many dividend stocks, particularly high yielders.
But it will likely be a picker's market. Investors probably won't be able to invest in any old dividend ETF and expect market-beating returns.
Here's my list of top dividend ETF picks for 2021.
Vanguard High Dividend Yield ETF (VYM)
Dividend Yield: 3.18%
VYM targets companies with forecasted above average dividend yields over the next 12 months, but excludes high yield REITs from its portfolio.
The fund has double digit allocations to financials, utilities, consumer staples and healthcare, so it very much has a defensive tilt. But it trades at a significant discount to the broader market and is positioned well if the economic recovery comes to fruition.
Invesco S&P 500 High Dividend Low Volatility ETF (SPHD)
Dividend Yield: 4.93%
SPHD starts by identifying the 75 highest yielding stocks from the S&P 500 and then targets the 50 stocks with the lowest realized volatility from that group.
SPHD is a bit of a feast or famine choice. It's typically either a top-tier performer or near the bottom, depending on whether or not it's in the market's favor. 2021 is one of those years it looks like it could do well. It's heavy in cyclicals and tech, is deeply undervalued and its 5% yield is difficult to match.
Invesco High Yield Equity Dividend Achievers ETF (PEY)
Dividend Yield: 4.39%
PEY invests in the highest yielding stocks from a universe of those with at least 10 consecutive years of dividend growth.
Again, another high yield choice, but the addition of proven dividend growth to the selection criteria makes it a more conservative high yield choice. It currently yields twice that of the dividend aristocrat universe.
Schwab U.S. Dividend Equity ETF (SCHD)
Dividend Yield: 2.97%
SCHD targets companies with high dividend yields, a record of consistently paying dividends and are selected for fundamental strength relative to their peers.
This ETF has long been one of my favorite funds regardless of market conditions. Like PEY, it also requires 10+ years of dividend growth, but from that universe looks for the highest yielding stocks that also display high ROEs and strong cash flow to debt ratios.
WisdomTree U.S. Small Cap Dividend ETF (DES)
Dividend Yield: 2.87%
DES invests in a broad universe of small-cap dividend payers and weights components by aggregate cash dividends paid.
After two years of steady underperformance relative to large-caps, small-caps are on the rise again. If the re-opening trade can carry into 2021, small-caps should continue to outperform. There's enough value here to make this an attractive trade for the first time in a while.
AAM S&P 500 High Dividend Value ETF (SPDV)
Dividend Yield: 4.16%
SPDV targets attractively valued U.S. large-caps that exhibit both a high dividend yield and sustainable dividend distribution characteristics.
Here's your under the radar pick for 2021. In addition to looking for both yield and growth, this fund targets companies that exhibit high free cash flow yields, one of my favorite metrics for determining a company's financial health.
iShares International Select Dividend ETF (IDV)
Dividend Yield: 6.15%
IDV invests in foreign high yielding stocks that combine dividend growth, solid dividend coverage and strong fundamentals.
International stocks are one of my favorite areas to target for 2021 given their above average growth and relative value combined with what I expect to be a falling dollar environment. The current 6% yield is higher than it's been over the fund's 13-year history and will no doubt appeal to dividend seekers.
WisdomTree Emerging Markets High Dividend ETF (DEM)
Dividend Yield: 4.59%
DEM targets the highest yielding stocks from emerging markets countries and weights those components by yield.
Another international dividend play, but focusing specifically on emerging markets, the area of foreign stocks that I expect to do particularly well. These areas are positioned relatively well in terms of COVID risk and the elimination of especially risky companies, according to various metrics, helps eliminate some of that tail risk.
Global X SuperDividend ETF (SDIV)
Dividend Yield: 8.94%
SDIV simply targets 100 of the highest dividend yielding equity securities in the world and is heavily weighted towards REITs and financials.
I expect financials and real estate to do especially well in an economic recovery and this fund is loaded with them. It's a risky bet, though, since its focus solely on yield makes it highly concentrated on yield-sensitive stocks, an area of the market that's gotten hammered in recent quarters.
Fidelity Dividend ETF For Rising Rates (FDRR)
Dividend Yield: 2.69%
FDRR is a large-cap portfolio consisting of stocks with high correlations to the 10-year Treasury yield.
Here's a different twist on a traditional large-cap holding. With ultra-low interest rates, another stimulus package likely on the way and virtually unlimited Fed support, I expect inflation rates to be on the rise in 2021, a situation which should lift interest rates as well. This fund is tilted towards tech, healthcare, financials and industrials.