New ETF offers the cream of the dividend crop

Reuters

By Chris Taylor

NEW YORK, Dec 17 (Reuters) - There are investors who couldn't care less about dividends, and there are those who love them with an unbridled passion. Count Steve Weiss among the latter.

The New York City public-relations rep first got a taste for dividends while working for publisher McGraw-Hill (now McGraw Hill Financial) in the late 1990s. Not only did the company pay a decent yield (topping 4 percent at the start of 1997, for example), it was a so-called 'Dividend Aristocrat' - one of those few companies that has raised its dividend every single year for at least the past 25 years.

Since then, Weiss has built a stock portfolio that concentrates much of his money in those long-term dividend growers. Today there are only 54 dividend aristocrats in the S&P 500, including such familiar names as Clorox (CLX), Colgate-Palmolive (CL), Consolidated Edison (ED) and Walgreen (WAG).

"I like buying healthy, high-yielding stocks of companies that have a commitment of returning cash to shareholders," says Weiss, 53, who remembers getting quarterly dividend checks as a kid, courtesy of IBM stock that his grandmother had given him. "It's like tapping into a gold mine."

To be sure, there could be choppier waters ahead for the dividend stocks. They have already enjoyed years of strong performance as a relatively safe harbor during economic crises, and could prove to be laggards in a rising-rate environment.

But for diehard investors like Weiss, who loves the one-two portfolio punch of getting a yearly dividend raise and then reinvesting those dividends, there's a new product that could serve as catnip: ProShares' S&P 500 Aristocrats ETF (NOBL), comprised of equally-weighted portions of each aristocrat and a slim expense ratio of .35 percent.

Investors have flung some $37 million at the fund since its October inception. The attraction: Since May 2005, when the S&P 500 Dividend Aristocrats Index began, it has boasted just under 10 percent in total annual returns, besting the broader S&P 500 by a little more than 3 percentage points a year.

"It appeals to two things investors are looking for, outperformance and low volatility," says Michael Sapir, CEO of ProShare Advisors, the investment advisor to ProShares. "It's an alternative to an S&P 500 index fund, or to actively-managed large-cap funds, and appeals to people who are looking for a good source of income."

New additions to the aristocrats index this year: Chevron Corp, Cardinal Health Inc, AbbVie Inc, and Pentair Ltd. Meanwhile, firms including Pitney Bowes, grocery chain SuperValu, and Eli Lilly have been booted from the index in recent years for failing to raise their dividends annually.

Of course dividend investing features its own menu of potential pitfalls. Since high-yielding stocks are often seen as proxies for bonds, they can fall out of favor in rising-rate environments, such as the one that looms ahead of us after years of rock-bottom interest rates.

With higher bond returns, investors could rotate back into fixed income products, eschewing the relative risks of equities. Skittish investors who have been buying these stocks since emerging from the financial meltdown of 2008-2009 have driven up valuations for sturdy dividend payers.

"The aristocrats are a pretty narrow group, and a lot of people have already piled into that group," says Ed Clissold, U.S. market strategist for Venice, Florida, based Ned Davis Research. "A lot of those dividend aristocrat stocks are now over valued."

Furthermore, a fat dividend in and of itself doesn't present a full picture of a company's fortunes. Comparing various dividend-oriented investing strategies, Ned Davis Research found that seeking big payout alone was actually one of the least-effective investment approaches. Over the last 35 years, portfolios of high-yield stocks lagged portfolios of dividend growers by some 1.5 percentage points a year. Dividend growers returned 16.33 percent annually over more than 35 years through June, the firm said.

Put simply: Growing dividends imply growing firms, but sky-high yields often occur when firms are in trouble.

There are other investment options in the space, apart from the ProShares' offering. Vanguard's Dividend Appreciation ETF, tracks the Nasdaq US Dividend Achievers Select Index, a menu of 146 companies that have been boosting dividends for 10 years or more. Its expense ratio is a miniscule .1 percent, with the fund gaining 88 percent over the past five years.

The SPDR S&P Dividend ETF tracks the S&P High Yield Dividend Aristocrats Index, comprised of the biggest yielders out of a much larger pool (the companies of the S&P Composite 1500) that have raised dividends for 20 years. Its expense ratio is .35 percent, and the fund has risen 83 percent over the last five years.

As for Weiss, he doesn't limit himself to dividend aristocrats, and has bolstered his portfolio with some high yielding blue chips that have not met the rising-dividend test.

"You also have to look at the underlying health of the companies," says Weiss. "If you're investing in strong cash machines and then reinvesting your dividends, you can't really lose."

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