Dividend payers lagged the S&P 500 (SPY) in 2021 as investors continued to favor only about a dozen mega-cap growth and tech names. Dividend stocks, in general, underperformed by about 2-3% with dividend growers doing slightly better than high yielders.
2022 has the potential of providing a more favorable environment for dividend stocks. As the Fed begins tightening monetary conditions, the omicron variant continues to spread and global economic growth slows, conditions could begin to favor a return to defensive assets.
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We've seen some of that already during the tail end of 2021. Even though the S&P 500 has pushed towards new all-time highs in December, we're seeing utilities, consumer staples, real estate and healthcare leading the way, not the traditional growth or cyclical names that have held serve throughout much of the year.
2021 also saw the S&P 500 experience a maximum drawdown of just over 5%, a trend I wouldn't expect to continue in the new year. With the potential headwinds the markets are facing, I wouldn't at all be surprised to see U.S. equities pull back 20% as all that stimulus cash and record low interest rates begin disappearing.
Dividend stocks could provide some defensive protection if markets turn volatile in 2022. Throughout my list of top dividend ETF picks for 2022, I'm leaning towards more conservative strategies, such as those focused on balance sheet health, attractive valuations and strong cash flows, or using risk mitigation techniques to protect on the downside.
Here are my 7 top dividend ETF picks for 2022.
Schwab U.S. Dividend Equity ETF (SCHD)
SCHD has long been one of my favorite dividend ETFs and I have no reason not to include it on this list. In a universe of more than 140 dividend-focused ETFs, its 30% return this year ranks it among the top 20. Its 16.7% average annual return over the past 5 years is the 6th best within this group.
While historical returns have been stellar, I like SCHD because it is one of the few dividend ETFs out there that applies qualifying criteria across all three dividend pillars - dividend quality, high yield and dividend growth (technically, the fund only requires the stock to be a long-term dividend "payer", but many fall under the dividend growth umbrella).
It pulls out the 100 highest-yielding names from a universe of stocks that display attractive cash flow to total debt, return on equity, dividend yield and 5-year dividend growth. If you're looking for a terrific long-term dividend ETF holding for your portfolio, SCHD should be right at the top of the list.
WisdomTree U.S. Quality Dividend Growth ETF (DGRW)
DGRW is perhaps one of WisdomTree's best ETF offerings and focuses on stocks demonstrating both quality and growth characteristics. The growth factor ranking is based on long-term earnings growth expectations, while the quality factor ranking is based on three year historical averages for return on equity and return on assets.
DGRW gets dinged a little for having a higher expense ratio of 0.28%. As a result, it only comes in at #35 in my quantitatively-driven dividend ETF rankings. On the plus side, however, it's one of the few equity ETFs that makes monthly dividend distributions.
VictoryShares U.S. Equity Income Enhanced Volatility Weighted ETF (CDC)
There's a lot going on in the name of this fund, but at its core it's targeting the 100 highest-yielding stocks from a volatility-weighted index of the 500 largest U.S. stocks. Low volatility stocks get a higher weighting and vice versa.
In addition, the fund uses a mathematical index construction process designed to mitigate risk during periods of market decline. It tactically reduces and increases exposure to equities if the markets fall or rebound to certain pre-determined trigger points. Think of it as an attempt to sell high and buy low in times of volatility.
The methodology is a bit complicated, but historically it has worked. CDC carries Morningstar's highest 5-star rating and has only captured about 78% of the broader market's downside over time. It has more than 60% of assets in the combination of utilities, consumer staples and financials, so it's quite defensively positioned.
ALPS Sector Dividend Dogs ETF (SDOG)
The dividend dogs strategy has been around for decades, but it's gotten a little lost in the shuffle in a marketplace that now includes dozens of different dividend strategies. Still, the concept is quite simple - identify and invest in the highest-yielding stocks within an index or sector.
In SDOG's case, it selects the five highest-yielding securities in ten of the eleven GICS sectors (excluding the Real Estate sector). The final portfolio is equal-weighted at both the stock and sector level in order to provide diversification while avoiding sector biases.
Its 4% yield is among the highest you'll find today within the dividend ETF universe and its exposure to names, such as AT&T (T), AbbVie (ABBV), IBM (IBM) and Bristol-Myers Squibb (BMY), certainly give it more of a defensive tilt.
Invesco S&P 500 High Dividend Low Volatility ETF (SPHD)
SPHD is another of my favorite dividend ETFs, but it has a history of being a feast or famine performer. From the period of 2013-2020, the fund performed in either the top 5% or bottom 10% of its peer group in every year, except one. This is one of those ETFs that you really need to time right, but if you do, you've got a top-tier performer in your portfolio.
The fund starts by identifying the 75 highest-yielding stocks from the S&P 500 and then chooses the 50 lowest volatility names from that group. It also comes with a 4% yield, so income seekers will likely appreciate it, but this fund is only modestly less risky than the S&P 500. It also has a 50% allocation to utilities, consumer staples and healthcare, so it will likely be positioned well in the event of a market drawdown.
Invesco High Yield Equity Dividend Achievers ETF (PEY)
This fund offers the intersection between long-term dividend growers and high yielders. In order to qualify for PEY, stocks must initially have an uninterrupted 10-year streak of consecutive dividend growth. From that universe, PEY invests in the 50 names with the highest modified dividend yield.
For comparison's sake, the ProShares S&P 500 Dividend Aristocrats ETF (NOBL) offers a current yield of 1.8%. PEY only requires a 10-year dividend growth history instead of the 25 years that NOBL does, but its 3.5% yield offers a huge income advantage while still tilting towards longer-term dividend growers.
Siren DIVCON Leaders Dividend ETF (LEAD)
If there's a dividend ETF that deserves more attention than it's getting, it might be LEAD. This fund uses a quantitatively-driven process that looks to identify the next big dividend growers. According to its website, it invests in "only the anticipated dividend growth leaders, the large-cap companies with the highest probability of increasing their dividend in the next 12 months." It looks at 7 different qualitative factors in order to develop a DIVCON score for each company with only the highest-rated stocks making the cut.
The methodology for stock picking may be proprietary, but it's clearly working. Of the more than 100 dividend ETFs with at least a 5-year track record, there's only one that's averaged a 20% annual return over the past 5 years and it's this one.