Since talk of the Federal Reserve tapering its bond-buying
activities began in May, there have been two prolonged periods of
rising 10-year Treasury yields. Or one period with a brief
respite of declining rates. Fact of the matter is 10-year
Treasury yields are a lot higher today than they were on May
That day, 10-year Treasury yields were 2.03 percent before
proceeding to climb to 2.73 percent on July 5. From there, the
10-year's yield would decline to 2.5 percent on July 19 only to
soar 15.5 percent over the following month.
Rising Treasury yields are problematic for income investors on
multiple fronts. Higher borrowing costs weigh on an array of
favored dividend asset classes and sectors, such as MLPs,
preferred stocks, REITs and utilities stocks. Higher borrowing
costs are perceived to be a negative catalyst that forces REITs
and MLPs to eschew dividend increases in favor of servicing debt
while the bond-like element to preferred stocks makes that asset
class sensitive interest rate increases.
ETFs For Dividend Consistency
Rising rates also plague some "old guard" dividend ETFs that
are too heavily focused on predictable dividend sectors rather
future sources of dividend growth
. Take the the SPDR S&P Dividend ETF (NYSE:
) as one example.
The $12.3 billion ETF allocates just over 14 percent of its
weight to rate-sensitive utilities and telecom stocks. Not an
excessive amount, but enough to have sent the ETF down 3.3
percent in the past month, roughly the same amount the fund lost
from May 22 through July 5. Bottom line: SDY is sensitive to
rising interest rates. The ETF has shown itself to be so not
once, but twice in the past 90 days.
Financial services, another sector that has a tendency to lag
during rising rate environments, is 16.8 percent of SDY's weight.
To be fair, SDY is not a "bad" ETF. Including dividends paid, the
fund, which only includes companies that have raise their
dividends for 25 straight years, has outpaced the SPDR S&P
) by 380 basis points over the past year.
However, if interest rates continue to rising, SDY and
comparable dividend ETFs will be hurt not only by some of the
sectors they do have exposure to, but those they lack decent
Time For The New Guard Some dividend ETFs have proven to be
less bad than others as Treasury yields have spiked. The problem
is, at least for some investors, is that some of the more
compelling dividend ETF options are, well, new.
The WisdomTree U.S. Dividend Growth Fund (NASDAQ:
) is a perfect example of a "new guard" dividend ETF. It is a
perfect example of a payout fund that has been less bad than its
older rivals as interest rates have risen. In the past month,
DGRW is off 1.5 percent. The newly minted fund lost 1.2 percent
during the late May through early July rate spike, performances
that easily top those of SDY over the same periods.
DGRW does not
focus on backward-looking, superficial
dividend increase streaks. The funds constituents are selected
and weighted based on earnings expectations, return on equity and
return on assets. Or factors that are integral to determining a
company's ability to pay and grow its dividend in the future.
Then there is sector weight. "An analysis of the 13
rising-rate environments over the past 64 years found that the
tech sector of the S&P 500 gained an average of 20% during
the 12-month period following the first rate hike of each cycle.
Health care stocks, meanwhile, represented the
second-best-performing sector, with a 13% average gain,"
according to Investment News
The worst-performing sectors, according to the Investment News
piece, were financials and materials. Those sectors combine for
less than 10 percent of DGRW's weight. Utilities are not found in
this ETF. On the other hand, technology and health care combine
for nearly 29 percent of the fund's weight.
Financials and materials combine for 28 percent of SDY's
weight, but health care and tech combine for just under 13
For more on ETFs, click
Disclosure: Author is long DGRW.
(c) 2013 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
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