Dividend Dichotomy: Growth vs. Value in ETFs
These days, it feels like everyone and his sister is in love with dividends. That much is highlighted by the soaring assets under management totals across an array of dividend ETFs this year.
Indeed, there is no getting around the fact that dividends are an important component in portfolios. So is dividend growth and it is reliable dividend increases that explain why many investors flock to blue-chips such as Procter & Gamble (NYSE: PG) even high-yielding fare is avaible elsewhere.
When it comes to ETFs, however, funds that screen constituents based on track records of dividend increases may be leaving something on the table. As WisdomTree Research Director Jeremy Schwartz points out in a research note published today, two major trends have driven U.S. dividend growth since the financial crisis, but those trends are excluded from dividend ETFs with requirements for dividend increase streaks.
"Many financial firms were forced to cut or eliminate their dividend payments as they received government assistance during the height of the crisis," wrote Schwartz. "Currently, those still in existence find themselves in a much stronger financial position and many are therefore allowed to reinstate or increase their dividend payments."
Of course, the rapid ascent of the technology sector to dividend king status cannot be overlooked. Amid significant dividend increases from Cisco (NASDAQ: CSCO) and Microsoft (NASDAQ: MSFT), among others, and a new dividend from Apple (NASDAQ: AAPL), the tech sector is largest dvidend-paying group among U.S. equities.
As Schwartz notes, since many tech firms do not have lengthy histories of dividend increases, they are excluded from those ETFs that screen on that basis.
Two of the most popular dividend ETFs on the market today, the Vanguard Dividend Appreciation ETF (NYSE: VIG) and the SPDR S&P Dividend ETF (NYSE: SDY), screen on the basis of dividend increase track records. VIG tracks the Dividend Achievers Select Index, which requires constituent firms to have raised their payouts every year for at least a decade. SDY tracks the S&P High Yield Dividend Aristocrats Index, which requires a dividend increase streak of 20 years. Combined, the two ETFs have about $21.3 billion in assets under management.
Oddly enough, it is the focus on length of dividend increase streaks that hurts the Dividend Achievers Select Index when compared to the WisdomTree Equity Income Index (WTHYE), the index tracked by the WisdomTree Equity Income Fund (NYSE: DHS).
"The 10-year requirement for inclusion in the Achievers Select affects the type of dividend growth that it is able to achieve," Schwartz said in the note. "Over the last 1- and 3-year periods, Achievers Select has significantly lagged the dividend growth of WTHYE. The 10-year requirement keeps the very firms currently driving dividend growth out of Achievers Select. WTHYE, on the other hand, can include either new or re-established dividend payers much more quickly, explaining its superior 1- and 3-year growth in trailing 12-month dividends."
Looking at things from the ETF level, VIG allocates 6.6 percent of its weight to tech stocks and 6.1 percent to financials. DHS devotes 12.6 percent of its weight to financials.
The WisdomTree Dividend Index (WTDI), which is tracked by the WisdomTree Total Dividend Fund (NYSE: DTD), also screens based on value, not length of boosted payouts. DTD has a weight of almost 17 percent to financials, its largest sector weight, and nearly 8.7 percent to tech stocks.
In fairness, it must be noted that VIG has easily outperformed DHS and DTD over the past five years and is cheaper than the WisdomTree funds, but as the dividend landscape has changed, DHS and DTD have narrowed the gap. In fact, over the past year, six months and year-to-date, the two WisdomTree offerings have easily outpaced VIG. In the past month as U.S. equities have faltered, VIG is the worst performer of the trio.
VIG also trails DHS and DTD in terms of yield. VIG's 30-day SEC yield is just 2.23 percent. That trails the 30-day SEC yield on DTD by more than 70 basis points. DHS has a 30-day SEC yield of 3.88 percent.
All of this is not to say investors should eschew dividend track records altogether. Rather, a combination of ETFs that screen for steady increases and those funds focused on the drivers of overall dividend growth could prove efficacious.
"Since it is impossible to say which might wind up in favor over any future period, we believe that adding a blended approach to dividend-focused index analysis could mitigate the risk of missing out on recent trends in dividend growth while also including the stability implied by longstanding dividend growers," according to Scwartz.
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