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
ETF (
DVY
), 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
is invested.
At the other extreme is the $11 billion Vanguard Dividend
Appreciation ETF (
VIG
). With its focus on dividend growth, rather than current yield
payouts, it has just 1% invested in the pricey utility
sector.
For long-term returns, it's clear that Vanguard Dividend
Appreciation's focus on dividend growth has its charms.
DVY Total Return Price
data by
YCharts
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 (
SCHD
), 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 (
WMT
), Johnson & Johnson (
JNJ
), Chevron (
CVX
), ExxonMobil (
XOM
) and Coca-Cola (
KO
). 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
inflation protection.
WMT Dividend
data by
YCharts
By comparison, among the three largest utility stocks in the
iShares Dow Jones Select Dividend Select ETF, only Entergy (
ETR
) has strong dividend growth averaging 9% over the past five
years; Integrys (
TEG
) has 3.6% dividend growth; ) and DTE Energy (
DTE
) 2.3% dividend growth. Those aren't exactly inflation
whippers.
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
stock charts
,
stock ratings
and
portfolio strategies
.