Along with a steady income stream, many dividend stock exchange traded funds have provided a healthy amount of price appreciation, bolstering investor portfolios with an attractive way to capture broad market returns.
For example, the PowerShares High Yield Equity Dividend Achievers Portfolio (PEY) , which has accumulated $436.8 million in assets under management, has increased 9.2% year-to-date.
The High Yield Equity Dividend Achievers Portfolio takes a similar approach as the PowerShares Dividend Achievers Portfolio (PFM) – both ETFs track a group of stocks with consistent growth in dividends. [A Dividend ETF’s Quiet Ascent]
However, PEY selects the dividend achievers with the highest yields. Consequently, the diverging indexing methodologies produce varying dividend yields as PEY has a trailing 12-month yield of 3.28%, whereas PFM has a 1.77% yield. Moreover, PEY issues a monthly dividend that is paid out around mid-month.
Stocks with steady dividend yields reassure investors of a company’s strong financial health. Additionally, dividend-payin stocks typically outperform those that do not pay over the long haul, with less volatility, due to the compounding effect of dividends on the investment’s overall return. Over the past 40 years, companies that boost payouts have proven to be less volatile than their counterparts that cut, suspended or did not initiate or raise dividends. [Fight Inflation With Dividend ETFs]
PEY shows a 5-year Sharpe ratio, a measure of risk-adjusted performance, of 1.44, compared to the S&P 500 index’s 1.25, according to Morningstar data. A larger Sharpe ratio corresponds with a better risk-adjusted return.
Nevertheless, potential investors should be aware that this type of dividend strategy may not outperform the broader equities market in a strong bull rally since the ETF tilts toward defensive sectors. Specifically, PEY’s largest sector components include utilities 24.5% and consumer staples 19.4%, with exposure to companies like Southern Co. (SO) 2.5% and Consolidated Edison (ED) 2.3%.
Looking ahead, the ETF may see pressure in a rising interest rate environment, especially given its heavy allocation toward rate-sensitive utility stocks.
Additionally, along with a value tilt, the ETF leans heavily on small- and mid-cap companies, which may be more volatile during short-term shake ups, including a 29.2% position in smal-cap value stocks, 7.7% in small-cap blend, 22.3% in mid-cap value and 3.7% in mid-cap blend.
For more information on dividend stocks, visit our dividend ETFs category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.