ETFs Benefiting From Dividend Growth
Amid a spate of dividend increases by a plethora of blue-chip companies, 2013 is proving to be another good year for income investors.
Not surprisingly, the ever-growing field of dividend ETFs, now home to about 50 funds and close to $70 billion in assets under management, and investors in those funds are benefiting as well.
Some noteworthy U.S. companies have boosted their payouts in impressive fashion this year. For example, Wells Fargo (NYSE: WFC) has increased its dividend twice in 2013 for a total increase of 36 percent, according to ETF issuer WisdomTree (NASDAQ: WETF).
Rival J.P. Morgan Chase (NYSE: JPM) has boosted its payout by 27 percent.
Wal-Mart (NYSE: WMT), the world's largest retailer, Ford (NYSE: F) and technology giant Qualcomm (NASDAQ: QCOM) round out the top-five dividend raisers in cash terms and that list does not impressive percentage increases from companies such as General Mills (NYSE: GIS).
The Cheerios maker recently said it will raise its dividend 15 percent later this year.
"While Financials have stolen the show in 2013 with some blockbuster dividend announcements following the recent stress test announcements, companies in all 10 market sectors are increasing their dividends," said WisdomTree Research Director Jeremy Schwartz in a new research note.
Schwartz notes that the U.S. dividend stream in cash terms currently stands at $342 billion, above the $329 billion seen in late November and well above the prior peak of $288 billion in November 2007. Importantly there is still room for ample dividend growth in some sectors.
"At the November 30, 2007, screening date, Financials comprised approximately one-third of the total dividend stream, but today they comprise only about 17%," said Schwartz. "Recent growth has been strong—with over $32 billion from the bottom in 2009 after the cuts through today. The latest increase came after the Fed's approval of their stress test results. Financials are still about $34 billion short of their November 30, 2007, high, though—the only sector that is still below its pre-financial crisis highs."
Investors looking to profit from rising bank dividends without making a single-stock bet or investing in a sector fund need to be mindful of an important issue. That being some of the largest dividend ETFs on the market today screen their constituents based on length of dividend increases.
So that means many U.S. banks, even the sturdier names such as J.P. Morgan and Wells Fargo, are not included in those ETFs because banks were egregious dividend cutters during the financial crisis. Current dividend increase streaks of two or three years are not enough to qualify for inclusion in some dividend ETFs.
Investors have options, though. For example, the WisdomTree Total Dividend Fund (NYSE: DTD) has an almost 17.1 percent weight to financials, making that sector the largest in the ETF by more than 300 basis points over consumer staples. DTD, which pays a monthly dividend, is up 6.7 percent year-to-date. Its largest bank holdings are J.P. Morgan and Wells Fargo.
The $1.46 billion WisdomTree LargeCap Dividend Fund (NYSE: DLN) features a 12.8 percent weight to financial services names. Up about 6.2 percent year-to-date, DLN also pays a monthly dividend and features J.P. Morgan and Wells Fargo as its two largest bank holdings.
Financial services is not the only sector delivering impressive dividend growth to investors. Starting in earnest last year, technology has started to make its presence felt as a dividend destination.
"This sector accounts for over 50% of the increase in dividends from November 30, 2007, to March 14, 2013, with $29 billion of the $53.5 billion total increase in dividends," according to Schwartz. "Technology firms are generally recent initiators with lots of cash on their balance sheets and potential for further dividend growth. From the November 30, 2009, low, this sector accounted for about 21% of the increase."
Technology is the second-largest sector weight in DLN behind consumer staples with Apple (NASDAQ: AAPL) and Microsoft (NASDAQ: MSFT) standing as the ETF's third- and fourth-largest holdings, respectively.
The WisdomTree Equity Income Fund (NYSE: DHS), which has a higher dividend yield and has outperformed DLN and DTD this year, has an almost 11.1 percent allocation to technology names with Microsoft being that ETF's second-largest holding. Intel (NASDAQ: INTC) is also found in the ETF's top-10 lineup. DHS currently does hold Apple.
"Financial firms, though still on the comeback trail, are widely expected to continue growing their dividends pending approval from the U.S. government. Information technology firms have large amounts of cash, so we may see more dividend initiations as well as dividend growth from that sector," said Schwartz.
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