Dividend
ETFs
have traditionally been attractive as a steady income generator
and defensive play. During the Financial Crisis, however,
dividend ETFs suffered from overexposure to financial firms.
Banks and insurance companies were throwing off cash in large
amounts, but these were not the safe, predictable dividends of
previous eras. These were dividends paid out of fees from
inadvisable real estate loans. When financials cratered, dividend
ETFs took it on the chin.
There is reason to believe that dividend stocks are once again
a steady income producer and defensive instrument. Sector
holdings in the SPDR S&P Dividend ETF (NYSEArca:SDY), for
instance, are spread out better than previously:
| Sector |
% holdings |
| Consumer Goods |
26.36% |
| Utilities |
21.23% |
| Industrial Materials |
16.92% |
| Financials |
10.41% |
| Health |
9.25% |
Financials are about half as important as they were in most
dividend ETFs. None of the sectors above are at frothy
valuations. Absent as usual is technology, whose companies
traditionally use every spare dime to fund new growth.
Other major ETFs in the area include Vanguard Dividend
Appreciation ETF (
VIG
), Vanguard High Dividend Yield ETF (
VYM
) and WisdomTree Total Dividend ETF (NYSEArca:DTD). In 2010 they
all rebounded nicely from a summer scare and did as good or
better than large caps generally (SPY):
More US companies cut their dividends in 2009 and fewer raised
them than any other year on record, according to Standard &
Poor's. As expected, dividend streams firmed in 2010, but yields
are relatively modest compared to historic norms.
A good stock yield these days is 3-4%. This is still strong
relative to Treasuries which pay out negligible rates.
Investment-grade bonds are in mid-single digits but offer no
equity upside. Bond experts like Bill Gross are so dismayed by
low bond yields that they are touting high-yield stocks even
though they have few funds in the asset class. Unlike fixed
income where the only danger is inflation and rising interest
rates, dividend stocks also have fundamental economic risk. This
low inflation environment, if it does not descend into true
deflation, is ideal for dividend stocks. Benjamin Graham, the
father of fundamental stock analysis, who often valued companies
on the basis of their expected future dividend payments, would be
pleased with their outlook.
For specialized dividend ETFs, WisdomTree is the clear leader
with dozens of offerings:
- WisdomTree Dividend Top 100 ETF (NYSEArca:DTN), annual
fees: 0.38%
- WisdomTree SmallCap Dividend ETF (NYSEArca:DES), annual
fees: 0.38%
- WisdomTree LargeCap Dividend ETF (NYSEArca:DLN), annual
fees: 0.28%
- WisdomTree MidCap Dividend ETF (NYSEArca:DON), annual
fees: 0.38%
Fundamental
- Invesco PowerShares Dividend Achievers ETF (
PFM
), annual fees: 0.5%
- Claymore/BBD High Income ETF (
LVL
), annual fees: 0.6%
- Invesco PowerShares High Yield Equity Dividend Achievers
Portfolio ETF (
PEY
), annual fees: 0.5%
- WisdomTree DEFA High-Yielding Equity ETF (NYSEArca:DTH),
annual fees: 0.58%
International
- WisdomTree Emerging Markets High-Yielding Equity ETF
(NYSEArca:DEM), annual fees: 0.63%
- WisdomTree Emerging Markets SmallCap Dividend ETF
(NYSEArca:DGS), annual fees: 0.63%
- WisdomTree Europe Dividend ETF (NYSEArca:DEB), annual
fees: 0.48%
- WisdomTree Europe High-Yield Equity ETF (NYSEArca:DEW),
annual fees: 0.58%
- WisdomTree Europe SmallCap Dividend ETF (NYSEArca:DFE),
annual fees: 0.58%
- WisdomTree International Dividend Top 100 ETF
(NYSEArca:DOO), annual fees: 0.58%
- WisdomTree International LargeCap Dividend ETF
(NYSEArca:DOL), annual fees: 0.48%
- WisdomTree International MidCap Dividend ETF
(NYSEArca:DIM), annual fees: 0.58%
- WisdomTree International SmallCap Dividend ETF
(NYSEArca:DLS), annual fees: 0.58%
- WisdomTree Japan Dividend ETF (NYSEArca:DXJ), annual
fees: 0.48%
- WisdomTree Japan High-Yield Equity ETF (NYSEArca:DNL),
annual fees: 0.58%
- WisdomTree Japan SmallCap Dividend ETF (NYSEArca:DFJ),
annual fees: 0.58%
- WisdomTree Middle East Dividend ETF (GULF), annual fees:
0.88%
- WisdomTree Pacific ex-Japan Dividend ETF (NYSEArca:DND),
annual fees: 0.48%
- WisdomTree Pacific ex-Japan High-Yielding Dividend ETF
(NYSEArca:DNH), annual fees: 0.58%
- SPDR S&P International Dividend ETF (NYSEArca:DWX),
annual fees: 0.45%
- Claymore/AlphaShares China Small Cap ETF (HAO), annual
fees: 0.7%
Co-founder of indexfunds.com, author of two books on
investing, and founder of ETFzone.com, Will has been writing on
indexing issues for 8 years. He holds an MBA from the
University of Texas at Austin.