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Some Dividend ETFs Throw Their Weight Around


U.S. dividend increases were strong in the first quarter, but a preference for momentum fare had dividend stocks and exchange traded funds trailing broader benchmarks.

Although biotechnology, Internet and other momentum stocks have rebounded from their March/April swoons, dividend ETFs are extending their out-performance of cap-weighted benchmarks with a broad spectrum of payout funds delivering noticeably superior returns compared to broad market indices since early March. [Dividend ETFs Again Outpacing S&P 500]

The strength of dividend stocks has been seen across, mid-, large- and small-caps. Large-cap dividend payers and the ETFs that hold those names have benefited as income investors have looked for added yield as Treasury yields have tumble.

“Generally speaking, Treasury yields are one of the biggest sources of competition for dividend-paying stocks in that many investors are simply looking for an income source. The lower the yield on the 10-Year note, the less competition faced by dividend-paying stocks, and we see this even if we just broadly note the performance of sectors in the S&P 500,” said WisdomTree Associate Research Director Chris Gannatti in a note out Monday.

The WisdomTree Equity Income Fund (DHS) and the WisdomTree LargeCap Dividend Fund (DLN) are up 9.6% and 8.1%, respectively, this year, easily trumped the 7% gained by the S&P 500.

The $886.1 million DHS holds over 380, nearly 90% of which have yields in excess of 10-year Treasuries. A combined weight of almost 20% to telecom and utilities stocks certainly helps DHS on the yield front, but that does not mean the ETF is overly sensitive to a potential rise in interest rates. [Beat Treasury Yields With These Dividend ETFs]

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. Additionally, DHS’ top-10 holdings feature a mix of new dividend growers, such as Microsoft (MSFT), along with companies that have decades-long dividend increase streaks like Johnson & Johnson (JNJ) and Procter & Gamble (PG).

“Historically, the WisdomTree Equity Income Index has tended to be strongly positioned for environments supportive of higher-yielding dividend payers, since it selects for this particular attribute from a broad universe of U.S. dividend payers,” added Gannatti.