ETFs For Dividend Consistency
Sometime in the coming months it is likely the number of dividend ETFs available to investors will swell to 200 and inflows to the existing products are about $90 billion since the start of 2010. So yes, it is fair to say depressed interest rates have sent income investors scampering into dividend stocks and the ETFs those equities call home.
What many income investors really like is payout consistency or knowing that their dividend stocks and ETFs have upwardly sloping payout trajectories, even if the slope is gentle and gradual. Some of the largest dividend ETFs oblige that desire.
Related Two Under-Appreciated Dividend ETFs.
In preparation of a market pullback, investors may want to put some of those dividend ETFs on their shopping lists. "We believe that when pullbacks happen, dividend stocks tend to fare better than others because their yields provide downside protection. While there are over one hundred stocks ranked by S&P Capital IQ as Strong Buy or Buy that offer a 2.5% or greater yield, an ideal way for investors to get diversification to many of these stocks is through ETFs," said S&P Capital IQ in a new research note.
S&P Capital IQ ran a screen for attractive opportunities among large dividend ETFs, excluding sector-specific funds in an effort to turn up diverse options.
"One thing investors should remember about dividends is that they are completely discretionary, so a company can choose to reduce or stop paying its dividend at any time. While S&P Capital IQ does not recommend ETFs based on yield alone, the consistency of dividend payments is a key component to the S&P Capital IQ Quality Ranking we use in our research," said the research firm.
The search turned up a mixture of popular ETFs, some of which focus on dividend increase streaks and some of which use other weighting methodologies.
The $12.4 billion SPDR S&P Dividend ETF (NYSE: SDY) garners an Overweight rating from S&P Capital IQ. SDY is one of the largest U.S. dividend ETFs, indicating investors hold a favorable view of gaining exposure to the S&P High Yield Dividend Aristocrats Index, which only includes companies that have raised their payouts for at least 25 consecutive years. Top-10 holdings in SDY include Dow components AT&T (NYSE: T) and Chevron (NYSE: CVX) and staples giant Clorox (NYSE: CLX).
S&P Capital IQ also rates the Vanguard High Dividend Yield Indx ETF (NYSE: VYM) Overweight. VYM's scant 0.1 percent annual expense ratio makes the fund cheaper than 91 percent of rival ETFs and that might be one reason why VYM had $9.5 billion in assets at the end of the July.
For a high yield ETF, VYM is surprisingly light on utilities and telecom names as those sectors combine for 13.5 percent of the fund's weight. Consumer goods lead the way at 15.6 percent while financials, energy and health care combine for 37.3 percent. Top holdings include Exxon Mobil (NYSE: XOM), General Electric (NYSE: GE) and Wells Fargo (NYSE: WFC).
VYM "seeks to track the performance of a benchmark index that measures the investment return of common stocks of companies that are characterized by high dividend yields," according to Vanguard.
ETFs using alternative methodologies to weighting by yield or dividend increase streaks are also viewed favorably by S&P Capital IQ. The research firm has Overweight ratings on the WisdomTree Dividend ex-Financials Fund (NYSE: DTN), the WisdomTree Total Dividend Fund (NYSE: DTD) and the WisdomTree LargeCap Dividend Fund (NYSE: DLN). Combined, those ETFs have over $3.1 billion in assets under management.
In particular, DLN and DTD offer investors solid exposure to sectors that have recently been and are expected to be dividend growth leaders in the future. Translation: These ETFs have comparatively high weights to consumer discretionary, financial services and technology relative to other diversified dividend funds.
For example, DLN has a combine 27.6 percent weight to tech and financials, two major contributors to S&P 500 dividend growth over the past several years. Those two sectors combine for over 30 percent of DTD's weight. Those sector mixes have worked for DLN and DTD because over the past three years, including paid dividends, the funds are up an average of 65 percent.
All three of the WisdomTree offerings focus on proportionate share of the aggregate cash dividends each component company is projected to pay in the coming year, based on the most recently declared dividend per share
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