History Says Nothing Beats This Dividend ETF for Total Returns

In sports debates, the final argument is simply the scoreboard. You can throw out all the stats and superlatives that you want about a player or team, but what it really comes down to is the scoreboard -- who won?

When it comes to rating exchange-traded funds (ETFs), the same argument largely holds up. I can throw earnings and ratios and percentages and all the advanced fundamental and technical stats in the world at you, but the one that matters most is returns -- how it has performed relative to its peers over the long term.

That's not to say it will continue to perform at that level. Past performance is no guarantee of future results, as the disclaimer goes. Determining whether an ETF will be a good investment in the future does often depend on its key metrics, the market, the economy, the industry, how it's managed, and if it has certain screens or factors, among other criteria.

Here is one dividend ETF that history says has been the best, with the highest average annualized total return over the past five years.

Image source: Getty Images.

The scoreboard doesn't lie

Aside from one sector ETF, no dividend ETF has posted better total returns over the past five years than the Franklin International Low Volatility High Dividend Index ETF (NYSEMKT: LVHI). According to ETF Database, this ETF has a five-year average annualized total return of 18%, with the dividends reinvested. The only dividend ETF that had a higher five-year average return was the sector-specific VanEck Energy Income ETF.

Among broad-market dividend ETFs, no ETF performed better than LVHI over the past five years. Interestingly, this ETF does not invest in U.S. stocks, which may be surprising given that the U.S. stock market is in a four-year bull market. The Franklin International Low Volatility High Dividend Index ETF tracks the proprietary Franklin International Low Volatility High Dividend Hedged index, which draws from the constituents of the MSCI World ex. USA Investable Market index.

This ETF includes stocks from international developed markets with relatively high yield and low price and earnings volatility. Stocks with yields not supported by earnings are excluded from the fund. Each stock in the portfolio is assigned a "stable yield" score, with stocks that have a relatively lower price and earnings volatility adjusted upward.

The portfolio also employs a currency hedge, with stocks from countries with relatively high interest rates compared to the U.S. adjusted downward. Overall, the weights are calculated to maximize its stable yield score, subject to certain concentration and liquidity screens.

The portfolio holds about 198 stocks, with 15% each coming from Japan, Canada, and the U.K. and 9% from France. The three largest holdings are Shell, Suncor Energy, and Canadian Natural Resources.

Why LVHI should continue to outperform

The LVHI ETF is up 15% year to date and 21% over the past year. It is currently paying out a robust 3.37% distribution yield, averaged over the trailing 12 months. That is one of the higher yields among broad-market ETFs, and when it is invested back into the fund, it boosts the total return.

A fund's return history is an important gauge of how the ETF has performed against its peers over a longer period of time. But when determining whether to invest in the fund, other factors must be examined, like its methodology, which focuses on and prioritizes stable, sustainable yields.

Its average price-to-earnings (P/E) ratio is also key, because it shows whether the ETF is filled with overvalued stocks. LVHI's P/E ratio is just 14, which makes it relatively low.

This ETF should also continue to benefit from its diversified portfolio of international, developed-market stocks. Many experts say international stocks will outperform U.S. stocks over the next 10 years, because they are cheaper and are expected to thrive from various growth catalysts. These include the spread of AI, more investment in defense and domestic infrastructure, and shuffling trade agreements, among other reasons.

So the LVHI ETF makes sense for investors based on its history of performance, its high dividend, the diversification it can offer, its low valuation, and its promising outlook.

Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Canadian Natural Resources. The Motley Fool has a disclosure policy.