With an average yield of 4%, the utility sector is an obvious
place to prowl for income.
Problem is, the ever-growing army of yield seekers has made
the sector an expensive place to invest.
The current PE ratio for the utility sector in the S&P 500
is 15.6, exceeding the 13.1 PE for the broad market benchmark. In
"normal" times, utilities, with their slower growth prospects
typically sell at a 25% discount to the market PE.
That makes a an ETF such as iShares Dow Jones Select Dividend
), with about one-third of its nearly $11 billion in assets
riding on the utility sector, a lot dicier than I imagine many
investors realize. My guess is they were hooked at the 3.5% yield
and haven't bothered to take a look under the hood at how the ETF
At the other extreme is the $11 billion Vanguard Dividend
Appreciation ETF (
). With its focus on dividend growth, rather than current yield
payouts, it has just 1% invested in the pricey utility
For long-term returns, it's clear that Vanguard Dividend
Appreciation's focus on dividend growth has its charms.
DVY Total Return Price
But if you're stuck on a high current payout, well, Vanguard
Dividend Appreciation is not going to float your boat; its
current 2.1% yield is well below the 3.5% for the iShares Dow
Jones Select Dividend ETF.
A new entrant in the dividend ETF space looks like an
intriguing goldilocks solution that delivers a strong yield while
also paying attention to growth factors for the underlying stock
and the dividend itself.
Schwab U.S. Dividend ETF (
), launched last fall, has a current yield of 3%. And it pulls
that off with just 3.2% invested in the utility sector. The ETF
does its dividend hunting among stocks in the Dow Jones Dividend
100 index. To be eligible for that index a stock much have a
10-year track-record of paying out dividends. The next cut is to
rate stocks on four criteria: cash-flow relative to total debt,
return on equity, dividend yield and 5-year dividend growth.
The five largest current holdings of Schwab U.S. Dividend ETF
are Wal-Mart (
), Johnson & Johnson (
), Chevron (
), ExxonMobil (
) and Coca-Cola (
). The lowest five-year annualized dividend growth rate among the
five is 7.6% (ExxonMobil). To be clear, that's more than double
the long-term inflation rate. No bond offers that sort of
By comparison, among the three largest utility stocks in the
iShares Dow Jones Select Dividend Select ETF, only Entergy (
) has strong dividend growth averaging 9% over the past five
years; Integrys (
) has 3.6% dividend growth; ) and DTE Energy (
) 2.3% dividend growth. Those aren't exactly inflation
Helping Schwab U.S. Dividend ETF grind out that nice 3% yield
is a rock-bottom fee charge of 0.17%. That's cheaper than the
0.40% annual expense ratio charged on the iShares Dow Jones
Dividend Select SPDR etf. In today's low-income world, keeping an
extra 0.23% in your pocket is a nice advantage.
Carla Fried is an editor for the
YCharts Pro Investor Service
which includes professional