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Beating Treasury Yields With a Dividend ETF


Ten-year Treasury yields have fallen more than 10% this year, but that does not mean every dividend ETF on the market offers a superior yield.

For example, the Vanguard Dividend Appreciation ETF (VIG) , the largest U.S. dividend ETF by assets, has a trailing 12-month yield of just 1.9%, or just four basis points above the yield on the SPDR S&P 500 ETF (SPY) . Including dividends paid, SPY has nearly tripled the returns offered by VIG this year. [Revisiting a Familiar Dividend ETF]

There are several dividend ETFs where a healthy number of the funds’ constituents feature better yields than what 10-year Treasuries offer. The $817.4 million WisdomTree Equity Income Fund (DHS) is one example. Eighty-eight percent of the almost 390 holdings found in DHS yield more than 10-year Treasuries, according to WisdomTree data.

As highlighted by the leadership of the utilities sector and resurgent real estate investment trusts, declining U.S. bond yields have benefited some high-yielding asset classes in 2014. [High-Yield Utilities Lead the Way]

DHS tracks “the WisdomTree Equity Income Index, which selects securities for inclusion based on dividend yield, has close to 90% of its weight in securities with a yield advantage over Treasuries. These higher-yielding securities, which underperformed last year as rates rose, have started to show relative strength against the broad market as rates have pulled back year-to-date,” said WisdomTree research analyst Tripp Zimmerman in a note out Monday.

DHS features a roughly 20% combined weight to utilities and telecom stocks, so the ETF does have some element of interest rate sensitivity to it. However, that exposure is countered by a 32% combined weight to financials and health care names, the former of which is seen as a beneficiary of rising rates.

Additionally, DHS allocates 11% of its weight to the technology, one of the leading sources of S&P 500 dividend growth in recent years and one of the top-performing sectors in rising rate environments. [Capturing Dividend Growth With ETFs]

“As equity markets and interest rates forged higher last year, investors repositioned out of defensive higher-yielding equities and into higher beta stocks to try to capture the upside return potential. With interest rates falling year-to-date and the broad equity markets mostly sideways, investors have become more constructive on the importance of dividend income,” Zimmerman said in the note.

The WisdomTree Equity Income Index, the underlying index for DHS, has a dividend yield of 3.61%, according to WisdomTree data, and a P/E of 16.85, slightly below the S&P 500.

DHS chages 0.38% per year and pays a monthly dividend. Since the March 2009 market bottom, DHS has handily outperformed each of the four largest U.S. dividend ETFs, gaining 273%.

WisdomTree Equity Income Fund


Tom Lydon’s clients own shares of SPY.