When it comes to income investing, perhaps the only thing
sweeter than the dividend itself is a steadily rising dividend.
Clearly, income investors love knowing that some companies raise
dividends year after year.
That helps explain why investors continue to allocate capital
to such familiar names as Coca-Cola (NYSE:
), Johnson & Johnson (NYSE:
) and Procter & Gamble (NYSE:
Those blue chips and plenty of others have lengthy histories
of increasing their payouts. In the cases of J&J and P&G,
those dividend increase streaks are now beyond five decades. ETF
sponsors have capitalized on the trend of investors' desire for
steadily rising payouts by constructing funds that use length of
dividend increase streaks as a primary screening criteria.
In fact, the two largest U.S. dividend
, the Vanguard Dividend Appreciation ETF (NYSE:
) and the SPDR S&P Dividend ETF (NYSE:
), both use dividend increase streaks as the way for filtering
possible constituents. VIG tracks the NASDAQ US Dividend
Achievers Select Index, which requires constituents to have
increased dividends every year for at least the past decade.
SDY tracks the S&P High Yield Dividend Aristocrats Index,
which requires a dividend increase streak of 25 years. Combined,
these two ETFs have about $25.8 billion in assets under
management, indicating investors are quite comfortable with these
ETFs, although both yield less than three percent.
However, for all the assets VIG and SDY have accumulated and
for all the attention these ETFs get in the mainstream media and
the blogosphere, investors should consider alternative weighting
methodologies with dividend ETFs. The proof is in the proverbial
pudding as some ETFs that do not use dividend increase streaks as
a primary weighting tool
have performed well over the past several
. Among that group are ETFs that weigh by yield.
Weigh By Yield Another common strategy employed by dividend
ETFs is weighting fund components by yield. Vanguard offers a
yield-weighted alternative to VIG in the form of the popular
Vanguard High Yield Dividend ETF (NYSE:
). VYM tracks the FTSE High Dividend Yield Index, which measures
the investment return of common stocks of companies characterized
by high dividend yields,
according to the issuer.
$7.5 billion in assets
at the end of March. The iShares High Dividend Equity Fund (NYSE:
) tracks the Morningstar Dividend Yield Focus Index, which
focuses only companies that pay dividends that are considered
qualified income, so no real estate investment trusts are found
in this ETF. The index takes the top 75 companies by yield and
filters for those that "have a Morningstar Economic Moat rating
of narrow or wide and have a Morningstar Distance to Default
score in the top 50% of eligible dividend-paying companies,"
according to Morningstar
HDV has amassed $3.2 billion in AUM barely more than two years
of trading. The First Trust Morningstar Dividend Leaders Index
) follows the Morningstar Dividend Leaders Index. That index
"captures the performance of 100 highest yielding stocks that
have a consistent record of dividend payment and have the ability
to sustain their dividend payments. Stocks in the index are
weighted in proportion to the total pool of dividends available
according to Morningstar
While FDL is not as big as its aforementioned peers, the ETF
is not exactly small. The ETF has nearly $610 million in assets
under management and its underlying index has consistently
outperformed the S&P 500 over one-, three- and five-year time
frames with a lower a standard deviation,
according to First Trust data
Speaking Of Returns Including paid dividends, SDY and VIG are
up 21.3 percent and 16.2 percent, respectively, over the past 12
months. Obviously, that is not too shabby. However, investors
have been compensated by reaching for some added yield. Over the
same time, the average return delivered by FDL, HDV and VYM was
Interestingly, all three of those ETFs
less volatile than SDY and VIG as well
Moving out to a two-year time frame, HDV is not only the best
performer of the group with a return of 38.6 percent, but that
ETF has also been the least volatile of the five funds
highlighted here. While being nearly 400 basis points less
volatile than SDY, HDV has outpaced that ETF by 870 basis points
over the past two years.
Since April 2011, FDL, HDV and VYM have generated average
returns of nearly 35 percent. The average return offered by SDY
and VIG over the same time is 26.4 percent.
To be clear, this analysis is not intended to knock VIG and
SDY. These are fine ETFs in their own right and if investors
prefer to own ETF that strives to include steady dividend
raisers, than VIG and SDY are excellent bets. And of course, as a
Vanguard ETF, VIG offers a paltry expense ratio of just 0.13
percent, making it less expensive than 88 percent of comparable
Then again, not only has VYM been the better performer, but it
has the lower expense ratio at 0.1 percent, making it cheaper
than 92 percent
of similar ETFs
For more on dividend ETFs, click
(c) 2013 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
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