Dividend ETFs had seen a lot of interest in the past 2-3 years
as investors searched for yield in the ultra-low interest
environment. They fell out of favor for some time after the taper
talk resulted in interest rates inching higher.
However as investors are now getting concerned about growth pace
of the economy and corporate earnings, dividend ETFs are back in
3 ETFs you can love forever
Dividends Triumph over Long Term
Dividends have accounted for more than 40% of total market
returns over a long time horizon (over the past 80
years). Further, since early 1970s, S&P 500 dividend
by 100% and by almost eight times since 2010.
At the same time, since most dividend paying companies are
stable, mature companies with solid cash flows these investments
provide greater stability and safety in a volatile environment
and the markets are expected to continue to be volatile this
Inside the wild ride of Biotech ETF
Dividends Continue to Grow at Record Pace
US companies continue to increase their
. 2013 was the fourth consecutive year of double-digit dividend
growth, after decline seen during 2007-2009. Further, dividend
increases continued their strong trend during Q1 2014.
Looking at sectors, all sectors excluding financials have
recorded an impressive 56% growth in the dividend stream since
2007, thanks mainly to a massive 221% surge in technology sector
Per FactSet Dividend Quarterly, financial sector is now expected
to lead the dividend growth, with 17.7% DPS growth estimate in
2014 and 15.1% in 2015. The surge in dividends is a result of
capital plans approval of 25 major US banks by the Fed. (Read:
3 Financial ETFs o play the bank stress tests
Overall, dividends are expected to grow 9.9% in 2014. Most large
companies have huge cash piles on their balance sheet and are in
a position to increase payouts to shareholders. Further, despite
recent increases, dividend payout rates are still quite low
(~36%) compared to their historical average of 52%, per S&P
High Quality or High Yield?
In my view, ETFs that hold stocks with high dividend growth
potential are much better for long-term investing than ETFs that
focus on high dividend yielding stocks. These stocks may not be
paying a huge yield now but they generally have a solid growth
According to a
based on the performance of both high yielding and dividend
growth stocks, over the past 85 years, dividend growth should
provide about 7% average annual return over the next decade while
high yield stocks will return only about half as much during the
same period. Further dividend-growth companies also look more
attractive in terms of valuation.
Stable, cash-rich companies that have a consistent record of
increasing their dividends have outperformed the boarder market
over the longer-term.
And, while the interest rates reversed their course this year,
they will start rising sometime in near future, so I think that
it is better to avoid ETFs that have a lot of focus on defensive
(bond-like) sectors including Utilities and Telecom.
Below we present three ETFs that focus on high quality stocks
with strong dividend growth potential. Further they not only have
low exposure to bond-like sectors, they are also well diversified
across individual companies, minimizing company-specific risks.
They have also been beating the broader market this year.
SPDR S&P Dividend ETF (
SDY follows the S&P High Yield Dividend Aristocrats index
that is comprised of highest dividend paying stocks within the
S&P Composite 1500 index that have consistently increased
their dividend every year at least for the last 20 years.
The fund made its debut in May 2005 and has now has $12.5 billion
in AUM. It has 95 securities in its basket and is well
diversified among them with the top holding accounting for just
about 3% of assets.
The ETF is dominated by financials stocks currently, which
account for 22% of assets, followed by Consumer Staples and
It charges an expense ratio of 35 basis points and sports a
dividend yield of 2.3% currently.
WisdomTree LargeCap Dividend Fund (
DLN is based on the WisdomTree LargeCap Dividend Index-a
fundamentally weighted index that is comprised of 300 largest
companies in the WisdomTree Dividend Index, weighted by
proportional share of cash dividend that each component is
expected to pay in the coming year.
Top holdings currently are Exxon Mobil (3.4%), Apple (3.3%) and
Microsoft (3.2%). Looking at the sector allocation Information
Technology takes the top spot (16%), followed by Consumer Staples
(15%) and Financials (14%).
The fund has a dividend yield of 2.4% and charges annual fee of
28 basis points. Launched in June 2006, it has managed to attract
$1.8 billion in assets so far.
FlexShares Quality Dividend Index Fund (
The ETF uses a proprietary model that includes factors like
profitability, management and cash flow. Firms are selected for
inclusion in the index based on expected dividend payments and
long-term capital growth potential.
Financials currently take the top spot with about 18% of assets,
followed by Information Technology (18%), and Energy (10%). Top
holding Wells Fargo accounts for just 3.7% of the asset base.
QDF has a nice dividend yield of 2.5% while the expense ratio is
modest at just 38 basis points.
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WISDMTR-LC DIV (DLN): ETF Research Reports
FLEXS-QLTY DIV (QDF): ETF Research Reports
SPDR-SP DIV ETF (SDY): ETF Research Reports
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