Despite attractive bond yields, dividend stocks still appeal to investors who want to grow their principal while receiving regular income. But the path to high equity payouts is typically littered with value traps—distressed companies with low stock prices and inflated yields. Downside protection can be tricky for index funds seeking high yields. Consider one of the highest-yielding index funds investing in US equities: the SPDR Portfolio S&P 500 High Dividend ETF SPYD. It lost over 45.0% during the market shock between Feb. 20 and March 23, 2020, compared with the S&P 500’s 33.8% loss.
Total return usually isn’t the prime focus of income-seeking investors, but they shouldn’t compromise their principal. Quality high-yield funds can get them to the happy middle place: moderate drawdown protection alongside above-average yields.
Weeding Out Value Traps
SPDR Portfolio S&P 500 High Dividend ETF’s problems start with its construction process: The fund ranks stocks by their 12-month projected yield and picks the top 80 names. It does nothing to filter out companies with tumbling stock prices and rocky prospects that keep up dividends to pacify stockholders. For instance, the fund held on to Macy’s M until the firm suspended dividends in March 2020, absorbing the stock’s 70% loss during the trough of the covid shock. Macy’s stock prices have been spiraling since the mid-2010s amidst a growing struggle for brick-and-mortar retailers.
Fortunately, there are other high-yield dividend funds with guardrails in their stock-selection process. Fidelity High Dividend ETF FDVV also starts with yield, but it also looks at each stock’s payout ratio and year-over-year dividend growth rate. Similarly, WisdomTree US High Dividend ETF DHS targets the top 30% highest-yielding US stocks, but it weeds out those with low-quality fundamentals and recent price drops. The strategy calculates a composite score using profitability ratios, cash flow metrics, and short-term historical returns, then removes stocks ranking low on the score.
These metrics point Fidelity High Dividend ETF and WisdomTree US High Dividend ETF toward financially healthy companies and rein in their exposure to low-quality names. The lineups of both exchange-traded funds have some small overlap with SPDR Portfolio S&P 500 High Dividend ETF, but they also enlist many stable blue-chip stocks such as Procter & Gamble PG and Exxon Mobil XOM.
Neither fund struggles with the quality of their portfolios. Their holdings tend to possess higher profitability ratios and lower leverage than those belonging to SPDR Portfolio S&P 500 High Dividend ETF. The trailing 12-month return on invested capital for WisdomTree US High Dividend ETF and Fidelity High Dividend ETF clocked in at 10.7% and 25.3%, respectively, as of June 2025. In contrast, the figure stood at 6.7% for SPDR Portfolio S&P 500 High Dividend ETF. These profitable stocks shone through in stress periods such as the covid shock mentioned before, when WisdomTree US High Dividend ETF and Fidelity High Dividend ETF outpaced SPDR Portfolio S&P 500 High Dividend ETF by 8.7 and 5.7 percentage points, respectively.
That safety comes at a slight drop in yield for WisdomTree US High Dividend ETF and Fidelity High Dividend ETF, but their trailing 12-month yields are still leagues ahead of the broad market thanks to their weighting methods. Exhibit 1 displays historical 12-month yields for all three ETFs against the iShares Russell 1000 ETF IWB. Investors still enjoy a yield increase between 1.5 to 2.0 percentage points with WisdomTree US High Dividend ETF and Fidelity High Dividend ETF compared with the broad market.
A Tale of Two Yield-Screened Funds
Weighting also plays a critical role in a dividend fund’s balance between risk and reward. Two high-yield ETFs that use similar selection criteria, such as Vanguard High Dividend Yield ETF VYM and SPDR Portfolio S&P 500 High Dividend ETF, can help illustrate the impact of different weighting approaches. Both select stocks with the highest expected dividend yields. SPDR Portfolio S&P 500 High Dividend ETF limits its portfolio to 80 stocks, while Vanguard High Dividend Yield ETF is broader and holds the highest-yielding half of the large- and mid-cap market.
But the most drastic difference between the two is the way each assigns weight. Vanguard High Dividend Yield ETF’s market-cap-weighted portfolio can become top-heavy during market frenzies. But this weighting scheme also keeps risk in check and cushions the impact of its yield-based screen. Price and yield have an inverse relationship: yields rise as prices fall. So, value traps with declining prices will naturally take on a smaller role in its portfolio.
Alternatively, SPDR Portfolio S&P 500 High Dividend ETF equally weights its holdings, and that comes with some trade-offs. It will tilt toward smaller names with higher yields, but it also completely ignores a stock’s past or present market capitalization and places more emphasis on smaller and more volatile names. SPDR Portfolio S&P 500 High Dividend ETF will double down on stocks with declining prices when it rebalances, which can increase its exposure to value traps.
Vanguard High Dividend Yield ETF’s market-cap-weighting approach becomes more obvious during stressful periods. Similar to WisdomTree US High Dividend ETF and Fidelity High Dividend ETF, Vanguard High Dividend Yield ETF beat SPDR Portfolio S&P 500 High Dividend ETF by an impressive 10.9 percentage points during the trough of the covid shock in March 2020. Vanguard High Dividend Yield ETF has consistently outperformed SPDR Portfolio S&P 500 High Dividend ETF since its October 2015 inception, and it was less volatile, too.
Sector Quirks
A pure yield-maximizing approach comes with risks. Chasing yield can quickly push a dividend ETF toward stocks with falling prices that are consistent with distressed companies—those that are cheap for a reason. Each of the high-yield alternatives to SPDR Portfolio S&P 500 High Dividend ETF offered a brake to slow down their exposure to this negative price momentum, whether in the stock-selection process or the weighting process.
No strategy is perfect, and the alternatives still carry quirks of their own, though their shortcomings are familiar issues plaguing dividend funds at large. High-yield funds often favor certain sectors, such as utilities. Stable stocks in this segment often distribute healthier dividends than budding tech companies. Overweighting these names drives up yield, but at the expense of higher sector concentration risk.
In some cases, these bets can help. For example, the weights on energy and technology stocks in WisdomTree US High Dividend ETF and Vanguard High Dividend Yield ETF began diverging a few years ago. WisdomTree US High Dividend ETF’s dividend-based weighting screen pushed it toward energy stocks in December 2021. This came at the expense of technology stocks, which it underweighted. Favoring energy over technology positioned it perfectly for the energy rally in 2022.
On the other hand, Vanguard High Dividend Yield ETF’s market-cap-weighting scheme kept its stake in energy stocks in line with their market prices. The sector trailed behind faster-growing segments of the market in 2021, and it represented a small portion of Vanguard High Dividend Yield ETF’s portfolio at the end of the year. That caused it to underperform the WisdomTree US High Dividend ETF for much of 2022. WisdomTree US High Dividend ETF came out ahead of Vanguard High Dividend Yield ETF by 7.6 percentage points over the first nine months of 2022.
But the advantage didn’t persist for long. The same sector tilts pulled Vanguard High Dividend Yield ETF ahead of WisdomTree US High Dividend ETF by 6.7 percentage points in 2023 when the trends reversed.
Dialing up yield can push high-yield dividend funds further away from the broad market. These quirks do not necessarily make for bad investments, but they will lead to a different pattern in return. Investors should understand where they stand on the yield spectrum. Higher yields will likely lead to a bumpier and less predictable ride.