Professionals and pundits can argue until the cows come home
about why conservative, low volatility sectors
such as consumer staples and health care
have been leading the market higher for about three years now. An
obvious reason is that these sectors and some others are chock
full of stocks that can be considered dreams come true for
dividend growth investors.
Sure, Procter & Gamble (NYSE:
had a rough day Wednesday
, but investors will likely let one bad day slide in exchange for
P&G's dividend increase streak that has spanned over five
decades. Same for Johnson & Johnson (NYSE:
). Was it any surprise that Exxon Mobil (NYSE:
) boosted its payout Wednesday? Not really, the largest U.S. oil
company has been doing just that for about three decades.
Bottom line: Investors love dividends, but the truly savvy
really love dividend growth stocks. However, some dividend growth
investors may think dividend growth is not a part of the game
, even with those ETFs that are explicit dividend funds.
It is probably just a simple misunderstanding. After all, with
equity-based ETFs, it is underlying components that drive the
fund's price action, so logically speaking it would also be the
holdings that dictate the ETF's payout and yield. With those
factors in mind, we examined the WisdomTree Dividend
ex-Financials Fund (NYSE:
) as possible ETF option for dividend growth investors.
DTN was selected for a few reasons. First, it is chock full of
U.S. large-caps. Second, the ETF's underlying index has had a
beta of just 0.78 and annualized volatility of less than 12.3
percent since inception,
according to WisdomTree data
. Finally, DTN was picked because it excludes financial services
stocks and we wanted to see if that insulated investors from
dividend cuts during the financial crisis.
To that last point, DTN did "fail", sort of, in the 2008-2009
time frame. The ETF's 2008 payout was $2.10 per share, but that
slumped to about $1.55 a share in 2009,
according to issuer data
However, DTN rebounded to a payout of $1.61 per share in 2010.
At the sector level, DTN does represent a valid option for
conservative dividend growth investors with utilities and
consumer staples names combining for nearly 30 percent of the
ETF's weight. Five utilities are found among the ETF's top 10
Interestingly, DTN's top-two holdings, Exelon (NYSE:
) and CenturyLink (NYSE:
are recent dividend cutters and in a big way
. Exelon, for example, will pay a second-quarter dividend of 31
cents down from 52.5 cents a share in the first quarter.
DTN offers some buffer those cuts on two levels. First, the
ETF only allocates 2.45 percent to Exelon and 1.99 percent to
CenturyLink. Second, DTN is home to plenty of other prodigious
For example, top-10 holding Reynolds American (NYSE:
) has nearly tripled its dividend since 1999. Dow components
) and Verizon (NYSE:
) are also working on impressive, multi-year dividend increase
streaks. Intel's (NASDAQ:
) dividend has more than tripled since 2005 and Altria (NYSE:
) is in the midst of a multi-decade dividend increase streak of
Bottom line: DTN offers dividend growth without being one of
the ETF's that screens by length of dividend increase streak.
DTN's underlying index weighs possible constituents by yield,
market capitalization, liquidity, earnings and other factors, but
not dividend increase streaks.
The result is DTN paid a 2010 dividend of $1.61, which rose
slightly to $1.64 the following year. In 2012, DTN paid $2.42 a
share. It must also be noted that DTN pays a monthly dividend,
which can be more useful for investors looking to reinvest
dividends more than just four times a year or for those investors
that need a more consistent income stream.
Specific to DTN, some folks may wonder how will the ETF's
dividend growth trajectory fair now that bank dividends are
starting to come back and the ETF offers no exposure to that
sector. Fortunately, the answer is encouraging. DTN's
third-largest sector weight (nearly 13 percent) is technology.
Technology is now the
largest dividend-paying sector in dollar
in the U.S. and also the fastest-growing growing dividend
One more thing to consider: Over the past three years, DTN has
gained 60 percent with 15.2 percent volatility. The SPDR S&P
Dividend ETF (NYSE:
), which requires its holdings to have dividend increase streaks
of at least 25 years, has returned 44.8 percent with
16.3 percent volatility over the same time
For more on ETFs, click
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