With yields on many dividend stocks above those of 10-year
Treasuries and money market accounts, investors have been
pouring cash into equity-based dividend ETFs
. That is a good idea, according to the views of S&P Capital
IQ in a new research note.
Even under a fiscal cliff scenario that would likely see the
top rate on dividend taxes surge, S&P is bullish on dividend
ETFs, saying "we expect that dividends will continue to have
appeal as a form of income, and that corporate America could
choose to increasingly utilize cash for special dividends before
new tax law goes into effect, or for stock repurchases. Also,
while equity ETFs are subject to the price volatility that stock
ownership brings, they also typically offer diversification among
In the note, S&P highlighted six equity-based dividend
ETFs, rating three Marketweight and the other three Overweight.
The three ETFs to earn the Marketweight rating are the nearly $11
billion iShares Dow Jones Select Dividend Index Fund (NYSE:
), the WisdomTree Dividend ex-Financials Fund (NYSE:
) and the WisdomTree Equity Income Fund (NYSE:
DHS is the best performer of that trio on a year-to-date basis
with a gain of almost nine percent. The other funds are each up
barely more than seven percent. DHS also nudged DTN and DVY in
terms of yield with a 30-day SEC yield of 3.94 percent, 10 basis
points higher than DTN and almost 40 basis points higher than
DVY. Eight of the top-10 holdings in DHS are Dow components,
including AT&T (NYSE:
), General Electric (NYSE:
) and Merck (NYSE:
S&P place Overweight ratings on the Utilities Select
Sector SPDR (NYSE:
), the SPDR S&P Dividend ETF (NYSE:
) and the iShares High Dividend Equity Fund (NYSE:
XLU is by far the worst performer of that trio year-to-date
with a gain of just 1.7 percent. Adding to that ETF's cautionary
tale is the view by some market observers that U.S. utilities are
richly valued on a historical basis and relative
to foreign equivalents
In defense of XLU, it is one of the least volatile of the ETFs
highlighted by S&P. The research firm said XLU has a beta of
just 0.33 against the S&P 500 over the past three years.
SDY, which screens for stocks that have dividend increase
track records of at least 20 years, has jumped 7.2 percent this
year while HDV has added nine percent.
By merely looking at the top-10 holdings of DHS and HDV, some
investors are apt to think the two ETFs are quite similar. The
performances of the pair seem to underscore that notion, too.
However, it is worth noting that DHS has the higher yield, is
home to over 300 stocks (HDV has 76 holdings) and is slightly
cheaper than its iShares rival. DHS charges 0.38 percent per year
while HDV charges 0.4 percent.
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