Expectations are in place for another strong year of dividend growth by U.S. companies and that ongoing trend is likely to prompt investors to continue allocating capital to dividend exchange traded funds.
“According to S&P Dow Jones Indices, 971 dividend increases were reported during the fourth quarter of 2014 compared to the 885 increases which were reported during the fourth quarter of 2013. For all of 2014, 3308 issues increased their payments, up 14.3% from the 2895 issues that increased their payments during 2013,” said S&P in a note out earlier this month.
With dividend growth on the rise, investors poured over $10 billion into dividend ETFs last year, once again making payout funds the primary drivers of asset growth for strategic beta ETFs. [Big Year of Dividend Growth Sends Cash to Dividend ETFs]
ETF issuers are not shying away from bringing new dividend products to market, but familiar funds such as the iShares Select Dividend ETF (DVY) remains popular with investors. The $15.6 billion DVY, which has a trailing 12-month yield of 3.03%, jumped 14.9% due in part to its 37.4% weight to the utilities sector, one of the largest among dividend ETFs. [Dividend ETFs With Big Utilities Weights]
“DVY seeks to track a Dow Jones index that screens by dividend growth and payout ratios, with the stocks selected based on yield. DVY has a 0.39% expense ratio and earns favorable ranking inputs for its relatively high S&P Capital IQ Quality Rankings and relatively low S&P Capital IQ Qualitative Risk Assessments. However, a number of its largest holdings are considered overvalued by S&P Capital IQ,” said S&P Capital IQ in a new research note.
DVY allocates nearly 49% of its combined weight to the utilities and consumer sectors, two of the sectors currently most overvalued relative to the S&P 500. S&P Capital IQ has a marketweight rating on DVY.
For investors looking to capitalize on a potential rebound by small-cap stocks this year, the WisdomTree U.S. SmallCap Dividend Growth Fund (DGRS) merits consideration.
DGRS, which debuted in July 2013 and has a distribution yield of 1.4%, yields slightly more than the Russell 2000 and has recently offered modest out-performance of the benchmark small-cap index underscoring the notion that dividends are advantageous with small-caps, particularly at times when smaller stocks are out of favor. [Even More Monthly Dividend ETFs]
“While S&P Capital IQ has analysis on a smaller percentage of DGRS’s assets, most of the stocks seem fairly valued and have average S&P Capital IQ Quality Rankings. However, the ETF is trading with bullish technical patters. DGRS has a 0.38% net expense ratio,” said S&P Capital IQ.
The research firm has an overweight rating on DGRS.
DGRS tracks the WisdomTree U.S. SmallCap Dividend Growth Index, which is weighed by fundamental factors such as growth expectations, return on equity and return on assets, according to WisdomTree.
WisdomTree U.S SmallCap Dividend Growth Fund
Tom Lydon’s clients own shares of DVY.