FDVV vs. HDV: Which Dividend Stock ETF is a Better Buy?

Why should anyone buy dividend stocks?

Dividend stock ETFs offer you the chance to own consistently profitable companies that are expected to deliver steady dividend income. There are no guarantees that any sector or type of fund will outperform the S&P 500 index or avoid the risk of loss. But dividend stocks are generally considered to be "calmer" and less volatile than tech stocks.

If you want to invest in dividend ETFs, two popular funds are worth considering. The Fidelity High Dividend ETF (NYSEMKT: FDVV) and the iShares Core High Dividend ETF (NYSEMKT: HDV) offer competitive dividend yields. The Fidelity fund has outperformed the iShares fund in recent years, but the iShares fund could be the better buy for the future. Here are a few reasons why.

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FDVV: a dividend ETF that's 26.7% tech

The Fidelity High Dividend ETF holds 110 stocks (plus two short positions), its trailing-12-month dividend yield is 2.79%, and it charges an expense ratio of 0.15%. This fund has delivered average annual returns (by net asset value) of 18.8% for the past three years, and 13.3% for the past almost 10 years since its inception in September 2016. Since then, this fund has strongly outperformed the iShares Core High Dividend ETF:

FDVV Total Return Level data by YCharts

But despite this strong performance, the Fidelity High Dividend ETF has a curious portfolio selection that should make dividend stock investors think twice. If you want to diversify your portfolio away from the major tech names that have become so top-heavy in the S&P 500 index, this fund doesn't fit the bill. Its portfolio holds a large portion of tech stocks, some of which don't even pay significant dividends.

The fund's top sector is Information Technology (26.7% of the fund), and its top four stock holdings are familiar names: Nvidia, Apple, Microsoft, and Broadcom. These four tech stocks make up more than 20% of the fund's holdings.

Although most of these stocks have delivered strong share price appreciation in recent years, they're not known for paying generous dividends. Microsoft's forward dividend yield is 0.90%, Broadcom's is 0.62%, Apple's is 0.36%, and Nvidia's is only 0.02%. Such low-dividend stocks seem like an odd choice to include in a "high dividend" ETF.

HDV: 15 years of 10.7% annualized returns

The iShares Core High Dividend ETF offers a portfolio that looks like a better fit for dividend investors. Its biggest sectors are consumer staples (24.6% of the fund), energy (21.4%), healthcare (16.5%) and financials (10.9%), with information technology making up only 8.2% of the fund's holdings.

This ETF holds 75 dividend-paying U.S. stocks with a 12-month trailing dividend yield of 2.88% and charges an expense ratio of 0.08%. Its top five stock holdings are:

• ExxonMobil (8.34% of the fund)
• Chevron (6.3%)
• Johnson & Johnson (5.6%)
• AbbVie (5.4%)
• Philip Morris (4.8%)

Instead of 20% of the fund tied up in just four tech stocks, the iShares Core High Dividend ETF has a broader sector mix, including Energy and healthcare. These companies are less likely to be affected by a possible tech downturn or AI bubble going bust.

In the past 15 years since the fund's inception in March 2011, it has delivered average annual returns of 10.7%. That's a solid long-term return on investment, especially if the fund can avoid the big drawdowns of a more volatile tech-heavy portfolio.

Why buy HDV instead of FDVV

I don't own either of these dividend ETFs. Both funds have underperformed the S&P 500 index since 2016:

HDV Total Return Level data by YCharts

But if I had to buy one, I would choose iShares Core High Dividend ETF. That's because it's a better fit for the strategic purposes of dividend stocks: to try to manage risk, avoid volatility, and get into different parts of the market away from the AI boom.

The Fidelity High Dividend ETF feels too risky to me. Although FDVV has outperformed in recent years, if the tech sector goes into a downturn, its tech-heavy portfolio might disappoint dividend-seeking investors.

The holdings in the iShares Core High Dividend ETF are more in line with the sectors and companies that I would want to buy for steady dividend income. It also has a lower expense ratio than the Fidelity fund. These are just a few of the reasons the iShares Core High Dividend ETF ranks among the best dividend ETFs.

Ben Gran has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends AbbVie, Apple, Broadcom, Chevron, Microsoft, and Nvidia. The Motley Fool recommends Johnson & Johnson and Philip Morris International. The Motley Fool has a disclosure policy.