Several investing trends popped up in a back-and-forth 2011, as advisors sought to tweak client portfolios to take advantage of new opportunities and adapt to a macroeconomic environment that featured a number of sudden and unexpected shifts along with a significant amount of volatility. One significant trend was a rush towards dividend-paying stocks, securities that became appealing as investors sought to both dampen portfolio volatility and increase current returns [see Top 10 Noteworthy ETF Trends of 2011].
Currently there are more than 40 dividend-focused ETFs available to U.S. investors, with aggregate assets north of $40 billion. So it shouldn’t be surprising that this segment of the ETF universe features a wide variety of product types and investment objectives; there are dividend ETFs covering U.S. stocks, developed international economies, and emerging markets. There are ETFs that focus solely on high yielding financials stocks (KBWD) and others that avoid the financial sector entirely (DOO).
But the geographic and sector differences are not the only factors that set apart this group of exchange-traded products; the lineup of dividend ETFs features a surprisingly wide range of dividend yields, the result of varying investment objectives and screening methodologies used [see also Details of Dividend ETFs: Consistency vs. Yield].
“Dividend Consistency” ETFs
At a high level, the throng of dividend-related ETFs can be bifurcated into products that focus on mximizing dividend yield and those that focus on selecting dividend consistency. While the former should be appealing to those looking to beef up the cash spit off from their portfolio, the latter can be very useful tools as well. Consistency of distributions should be a core component of dividend-focused strategies; most investors pursuing dividend ETFs are interested in maintaining a position for the long-term, and companies that can’t be counted upon to continue their dividend payments going forward may lose their appeal [see Dividend ETF Investing: Four Critical Factors To Consider].
Along with several ETFs that focus on maximizing yield, there are a number of ETFs out there that assemble portfolios of the most consistent dividend-paying stocks:
SPDR S&P Dividend ETF (SDY)
This ETF can be considered somewhat of a hybrid dividend product since it incorporates both a focus on high yield and dividend consistency in its methodology. SDY invests in 50 of the highest dividend yielding constituents of the stocks of the S&P 1500 Index that have consistently increased their cash distribution over the last 25 years. As opposed to only focusing on either high yield or consistency, this fund selects stocks that have both above average yields and dividend consistency characteristics.
The resulting portfolio consists of just over 60 securities that are spread out across multiple sectors, featuring exposure to consumer defensive, industrials, financial services, consumer cyclical, and utilities sectors. SDY stands out from other dividend consistency ETFs by including small and mid cap firms in addition to more popular large cap securities. At a relatively low expense ratio of 0.35%, SDY is a nice option for investors wishing to add both consistency and high yielding dividend exposure to their portfolios [see Dividend ETF Gets A Makeover].
PowerShares Dividend Achievers Portfolio (PFM)
This ETF tracks the Broad Dividend Achiever Index, a benchmark that is designed to identify a diversified group of dividend-paying companies. To be included in the index, companies must have increased their cash distributions for ten or more fiscal years. The resulting portfolio is much deeper and broader than SDY’s with its underlying basket of nearly 190 securities. The holdings are, however, heavily biased towards giant and large cap companies, which together account for more than 85% of the fund’s total assets.
The fund’s portfolio is a collection of some of the the biggest and well-known U.S. companies; the largest allocations include IBM, Johnson & Johnson, and AT&T. Taking a closer look at the fund’s underlying holdings shows that a large portion of assets are allocated to the consumer defensive (27%), energy (17%), and industrials (15%) sectors. With an expense ratio of 0.5%, PFM is slightly more expensive than SDY and VIG, but the fund does provide investors exposure to a much broader basket of dividend consistent securities [see also Ben Graham 50/50 ETFdb Portfolio].
Vanguard Dividend Appreciation ETF (VIG)
This ETF tracks an index that is designed to measure the performance of U.S. common stocks that have a history of increasing dividends for at least ten consecutive years. Not surprisingly, VIG’s portfolio consists of mainly large and giant cap companies, which are considered to be part of the safer segment of the U.S. equities market.
VIG’s underlying basket of securities consists of nearly 130 holdings spread across a wide array of sectors, featuring exposure to consumer defensive, industrials, energy, and consumer cyclical sectors. Top holdings of the fund include McDonald’s Corporation, IBM, and Coca-Cola Company. VIG has an expense ratio of just 24 basis points, making it the cheapest fund on our list .
VIG has caught the attention of many investors with its incredible performance in 2011. The fund saw inflows of $3.7 billion on the year, a 95% growth from 2010′s inflows. Additionaly, AUM more than doubled to $8.5 billion from its favorable performance and inflows [see The Five Biggest ETF Inflows of 2011].
While ETFs that focus on companies with long and consistent records of making dividends may be useful for lowering overall volatility, it should be noted that the yields generated by these funds are not always a significant upgrade from broad-based equity funds. Theoretically, ETFs that consists of stocks that have regularly increased their dividend could exhibit a lower overall dividend yield than the market; the requirement for inclusion in these ETFs in consistency of payouts, not magnitude of dividend yield. That’s not the case with the ETFs highlighted above in the current environment; the yields on these products beat the S&P 500 by a meaningful margin, though they do represent an upgrade in yield of less than 100 basis points over a fund like SPY:
|S&P 500 Index Fund (IVV)||2.01%||n/a||2.07%%|
|SPDR S&P Dividend ETF (SDY)||n/a||3.19%||n/a|
|PowerShares Dividend Achievers Portfolio (PFM)||2.43%||2.47%||2.16%|
|Vanguard Dividend Appreciation ETF (VIG)||2.32%||n/a||n/a|
With dozens of dividend-focused ETFs now on the market, it is important to understand the methodologies that go into these funds and the impact on effective yield, volatility, and return potential.
Disclosure: No positions at time of writing.
- Details Of Dividend ETFs: Consistency vs. Yield
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- Dividend ETF Investing: Four Critical Factors To Consider
- Dividend ETF Special: 25 Equity ETFs With Attractive Distribution Yields
- Firstrade Offers Commission Free ETFs