4 of the Most Secure Discounted Dividend ETFs to Shield Your Investments

Discounts are reflexively attractive for anyone who does price comparisons. Some cultures even view discount hunting as a competitive sport, something that comic Russell Peters and others have joked about in their stand-up comedy shows. 

In the investment arena, obtaining a discount is usually much more difficult, and is something mostly available to institutional traders and investors who buy and sell large volumes of bonds, stocks, and other securities. Nevertheless, there are situations when individual investors can take advantage of discounts in the market: when purchasing Exchange Traded Funds (ETFs) on US exchanges where the market quote price is lower than the Net Asset Value (NAV) price. 

Of course, ETFs with underlying volatile indexes or securities might appear to have a market price/NAV arbitrage opportunity, but in those cases, NAV might be a lagging statistic. However, in the case of dividend ETFs, that aspect is mitigated to a degree (covered call dividend ETFs excluded). Getting a discount on a dividend ETF amounts to an added cost basis reduction on top of regular dividends, which is a net cash back payment  for shareholders. 

The following four (4) discounted dividend ETFs are based on market price at the time of this writing. 

SPDR S&P Dividend ETF

The SPDR S&P Dividend ETF has a minimum 20 consecutive year dividend increase history cutoff policy for portfolio consideration.

SDY:  $135.70    NAV: $136.89

The SPDR S&P Dividend ETF (NYSE: SDY) specifically tracks the highest dividend paying companies in the S&P Composite 1500 Index. Those companies have dividend increase histories for at least 20 years, with the bulk of them qualifying as dividend aristocrats, if not as dividend kings. 

Top 3 holdings: 1) Microchip Technology Inc.: 2.41%; 2) Verizon: 2.40%, 3) Realty Income Co.: (2.18%)

Top 3 sectors: 1) Industrials: 19.53%, 2) Consumer Defensive: 15.65%, 3) Utilities: 13.92%

While the 20 year dividend increase minimum ensures the pedigree quality of the stock portfolio, the stability and earnings strength consistency offsets gains that could be realized if higher flying stocks were included.  If one is looking for slow and steady gains with the reliable dividend increase component in their own portfolio holdings, getting SDY at an extra discount to NAV is a bonus. 

Vanguard Dividend Appreciation Index Fund ETF Shares

Broadcom stock holds the largest portfolio position in the Vanguard Dividend Appreciation Index Fund ETF Shares.

VIG $203.69  NAV: $205.91

The S&P U.S. Dividend Growers Index is also focused on steady and slow growth, with low volatility based on Fortune 500 companies that meet categorization for Dividend King (50 or more consecutive years of increased dividends) and Dividend Aristocrat (25 or more years in a row of increased dividends) criteria. 

The Vanguard Dividend Appreciation Index Fund ETF (NYSE: VIG) is a popular ETF with a portfolio reflecting this exact index. It has a consecutive 10-year minimum dividend increase bar for inclusion. Surprisingly, the top 25% companies with the highest yields are excluded from the 330+ stocks on the VIG roster. VIG has a Morningstar gold ETF ranking. Investors who subscribe to the FIRE (Financial Independence Retire Early) philosophy have touted VIG for growth and income in retirement portfolios utilizing a DRIP (dividend reinvestment plan) agreement for dividends. 

Top 3 holdings: 1) Broadcom: 5.66%; 2) Microsoft: 4.86%, 3) JP Morgan Chase: 3.99%

Top 3 sectors: 1) Technology: 27.14%, 2) Financial Svc.: 22.62%, 3) Healthcare: 15.17%

Interestingly, if any portfolio stock misses a dividend payment, it is promptly removed, and cannot be readmitted to the portfolio for 10 years, in which it must re-establish its unbroken streak of dividend increases. 

Vanguard High Dividend Yield Index Fund ETF

Although Vanguard High Dividend Yield Index Fund ETF chooses stocks by dividend yield size over growth, it weights the portfolio by market capitalization to mitigate risks of yield trap stocks with deteriorating fundamentals.

YYM $132.67  NAV: $134.15

For a solid high dividend yield ETF, one worth serious consideration is the Vanguard High Dividend Yield Index Fund ETF (NYSE: VYM).  Created 19 years ago in 2006, The Vanguard High Dividend Yield Index Fund ETF is Vanguard’s ETF for investors seeking to track the FTSE High Dividend Yield Index.  Unlike with VIG, VYM emphasizes yield size over yield growth. Excluding REITs, this ETF weighs the stock rankings by market cap to mitigate the risk of including stocks with high yields due to deteriorating financials. 

Top 3 holdings: 1) Broadcom: 6.45%; 2) JP Morgan Chase: 4.08%, 3) Exxon Mobil: 2.37%

Top 3 sectors: 1) Financial Svc.: 21.65%, 2) Technology: 15.96% 3) Healthcare: 12.49%

Vanguard International Dividend Appreciation Fund

The Vanguard International Dividend Appreciation Fund is an ETF that specializes in non-US company stocks for its portfolio.

VIGI $85.56  NAV: $86.01

International ETFs offer investors the opportunity to invest in companies from foreign nations, some of which have become well known names, like Novartis and Sony, whose shares on their domestic exchanges might be more lucrative than their equivalent ADRs. The Vanguard International Dividend Appreciation Fund (NASDAQ: VIGI) is an ETF that specifically tracks the S&P Global Ex-U.S. Dividend Growers Index. The minimum cutoff inclusion standard is 7 years of dividend growth in a row. The ETF market weighs its stock selections in a similar protocol to VYM. If a stock misses a dividend payment, it likewise is removed and will not be considered for readmission for 7 years, like with VIG. 

Top 3 holdings: 1)SAP SE: 4.05%; 2) Novartis AG: 3.93%, 3) Royal Bank of Canada: 3.74%

Top 3 sectors: 1) Financial Svc.: 22.33%, 2) Industrials: 19.94% 3) Healthcare: 17.05%

Some Warning Tips To Research Before Taking The Plunge

If one is looking for arbitrage discount opportunities when investing in dividend ETFs, assuming that there is good liquidity and no undue market irregularities, like a large institution holding such a large position that it can skew the market for a particular ETF, here are some things to checkbox for risk mitigation:

• Time Zone differences: International ETFs may sometimes display a time zone lag for updating its NAV, so if the perceived arbitrage gap closes the next day with the NAV update, the gap might not be genuine and only “optical”, i.e., simply a late update. In those cases, the market price was probably a fair value price. 
• If the stability of the discount should fluctuate appreciably (greater than $0.50), then that could be a warning sign for increased risk.