Dividend stocks and
have been all the rage this year, underscoring the
risk off nature of the broader market's rally
Low volatility, high dividend sectors such as utilities
health care and consumer staples
have driven stocks higher. With a potentially bumpy ride ahead
for investors over the next few months, dividends may take on
"While we believe equities should move higher in the next
twelve months, the journey will likely be a volatile one. With
that in mind, we think investors might find investment strategies
focused on consistent dividend-paying stocks appealing. Not only
can they help protect against downside in a market pullback, they
can also aid returns during a subsequent potential market rally,"
said S&P Capital IQ in a new research note.
The research firm pointed out that since 1926, more than 40
percent of the total return for the S&P 500 has come from
Investors have plenty of dividend ETFs from which to choose,
but the largest by assets is the Vanguard Dividend Appreciation
). The Vanguard Dividend Appreciation ETF, which is home to
nearly $14.6 billion in assets under management, garnered an
Overweight rating from S&P Capital IQ.
VIG has annual expense ratio of 0.13 percent, making it less
expensive than 88 percent of comparable funds,
according to Vanguard
. The ETF tracks the NASDAQ US Dividend Achievers Select Index,
which requires constituents to have increased dividends every
year for at least the past decade.
"While the stocks inside this portfolio have strong records of
dividend increases, investors should be mindful that dividend
increases due not occur in perpetuity," said S&P in the note.
"So we think looking at the underlying holdings' earnings
potential to see if there is room for dividend growth is
warranted. We believe that a dividend-to-earnings payout
percentage of below 70% gives a company flexibility to invest for
growth and still raise its dividend. As of the end of 2012, the
S&P 500's payout ratio was 43%, versus an average of 52%
since the mid-1930s."
VIG holds 147 stocks and its top-10 holdings represented 39.5
percent of the ETF's weight as of March 31. The ETF yields around
2.2 percent and is surprisingly light on some of investors'
favorite dividend sectors. Telecommunications and utilities
combine for just 1.3 percent of VIG's weight while health care
receives an allocation of 8.4 percent.
VIG makes up for that with a 24 percent weight to consumer
staples names. In fact, four of VIG's top-five holdings - PepsiCo
), Procter & Gamble (NYSE:
), Coca-Cola (NYSE:
) and Wal-Mart (NYSE:
) - are also four of the top six holdings in the Consumer Staples
Select Sector SPDR (NYSE:
Other prominent sector weights in VIG include 18.7 percent to
indusrials, 12.8 percent to consumer discretionary and 12.4
percent to energy. Eight of the ETF's 10 largest holdings are
members of the Dow Jones Industrial Average with Pepsi and Abbott
) being the outliers.
Through March VIG and its mutual fund equivalent, the Vanguard
Dividend Appreciation Index Fund (
) had a "beta of 0.84 and the standard deviation of 12.8 for both
funds were relatively low compared to the S&P 500 Index and
the broader equity ETF and mutual fund universes that S&P
Capital IQ has rankings on," according to S&P.
VIG has outperformed the SPDR S&P 500 (NYSE:
) over the past 12, 24 and 36 months while being less volatile
than SPY over all those time frames. In the past year, VIG is up
16.2 percent compared to 15 percent for SPY.
For more on ETFs, click
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