There are stocks that pay dividends and then there are dividend stocks. The latter group is comprised of those companies that raise their dividends every year, giving investors dependable and growing income.
Long-term return data prove the point that while there is a favorable difference between dividend payers and non-dividend stocks, dividend growers beat both groups. From 1972 through 2012 companies that initiated or consistently raised dividends outperformed and were less volatile than the companies either did not pay, cut or kept dividends stagnant, according to Ned Davis Research. [Dividend Growth With ETFs]
Some of the largest U.S. dividend ETFs include dividend increase strengths as cornerstones of their weighting methodology. Popular examples are the Vanguard Dividend Appreciation ETF (VIG) and the PowerShares Dividend Achievers Portfolio (PFM) , both of which require 10 years of higher dividends for admission.
The $12.4 billion SPDR S&P Dividend ETF (SDY) goes even further. SDY tracks the S&P High Yield Dividend Aristocrats Index, which mandates that is components have 25 consecutive years of increased payouts.
S&P Capital IQ rates SDY overweight, the research firm’s highest ranking, “based on an analytical approach that looks at past performance, the likely future prospects of the 95 underlying holdings, risks, and costs. The S&P Capital IQ ETF report on SDY notes the holdings have both capital growth and dividend income characteristics,” according to a new research note.
SDY is light on the technology sector with an allocation of just 3.9%, an important footnote because tech has been one of the largest contributors of S&P 500 dividend growth over the past several years. However, SDY does feature a 21.4% weight to financial services, its largest sector weight by 500 basis points over staples.
SDY’s financial services exposure not only because dividend growth in that sector is rebounding, but also because rampant dividend cutting by banks during the financial crisis, many bank stocks do not have long enough dividend increase streaks to qualify for admission into some ETFs that focus on dividend increase streaks. [Revisiting a Familiar Dividend ETF]
SDY, which yields 2.28%, skirts the issues with financial services dividends by focusing on regional banks and insurance providers, not the money center and investment banks that were dividend offenders during the crisis.
“The dividend growth focus of this ETF offers a nice combination of high exposure to traditional high-dividend paying defensive sectors as well as more cyclical sectors,” says Todd Rosenbluth, director of ETF research for S&P Capital IQ.
Dividend growth is useful on another front: As an inflation fighter. Since the early 1970s, when inflation ran as high as 11% per year, aggregate annual dividends of the S&P 500 have grown more than 1,000%, to $34.99 from $3.16 a share, according to the Wall Street Journal. [Fight Inflation With Dividend Growth ETFs]
SDY, which charges 0.35% per year, is up 1.6% this year. The ETF outperformed its peers for the past three and five years, according to S&P Capital IQ.
SPDR S&P Dividend ETF