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
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:
) 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
) and Microsoft (NASDAQ:
), among others, and a new dividend from Apple (NASDAQ:
), the tech sector is largest dvidend-paying group among U.S.
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:
) and the SPDR S&P Dividend ETF (NYSE:
), 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:
"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
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
The WisdomTree Dividend Index (WTDI), which is tracked by the
WisdomTree Total Dividend Fund (NYSE:
), 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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