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Surging Utilities-Heavy Dividend ETFs

With the Utilities Select Sector SPDR (NYSEArca: XLU ) up 14.4%, good for one of the best performances among any traditional sector exchange traded fund (ETF), it is not surprising that utilities-heavy dividend ETFs are benefiting as the utilities soars.

The iShares Select Dividend ETF (NYSEArca: DVY ) is part of that group with a year-to-date gain of over 9%. DVY remains alluring for income ETFs, in part due to a screening methodology that includes dividend growth and payout ratios. On the bright side, recent history shows dividend ETFs can whether the rising Treasury yields storm. That happened in 2013 when Treasury yields surged, but DVY turned in a solid annual performance despite those rising Treasury yields.

Related: Low U.S. Interest Rates Boost International Dividend ETFs

The current environment has been especially favorable for DVY because the ETF allocates nearly 32% of its weight to utilities stocks, this year's best-performing sector. That gives DVY one of the highest weights to utilities names of any ETF that is not a dedicated utilities fund. On a trailing 12-month basis, DVY yields north of 3.1%.

Low interest rates in the U.S. have sent investors flocking to dividend stocks and exchange traded funds in recent years. With central banks throughout the developed world paring rates and engaging in monetary easing, government bond yields are falling, giving investors good reason to consider high yield dividend ETFs.

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DVY is home to nearly 100 stocks, including well-known dividend payers such as Dow component McDonald's ( MCD ), Kimberly-Clark ( KMB ) and Phillip Morris International ( PM ).

"DVY is a strong dividend focused ETF and a natural choice for dividend focused investors. If the fund offered a lower expense ratio it might increase materially in size because it would be such a desirable allocation. The dramatic strength the portfolio demonstrated by outperforming the S&P 500 over the last several months was great, but I don't see evidence of the performance falling off suddenly," according to Seeking Alpha analysis of DVY.

Other well-known U.S. dividend ETFs include the The SPDR S&P Dividend ETF (NYSEArca: SDY ) and the ProShares S&P 500 Aristocrats ETF (NYSEArca: NOBL ) . However, those ETFs differ from DVY by requiring member firms to meet minimum dividend increase streaks of 20 year and 25 years, respectively.

Related: Best of Both Worlds With This Dividend ETF

Dividend growth as a means of trumping inflation could and arguably should serve to highlight the advantages of the ETFs that focus on dividend growth stocks. That group is comprised of well-established ETFs that emphasize dividend increase streaks as well as a new breed of funds that look for sectors chock full of stocks that have the potential to be future sources of dividend growth.

"The high dividend strategy remains a powerful technique in a period of low interest rates since investors in dividend champions may be materially less willing to sell their holdings when the market is declining. This strategy reduces the volatility of the portfolio during weakness in the general market," adds Seeking Alpha on DVY.

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iShares Select Dividend ETF

Tom Lydon's clients own shares of DVY, NOBL and SDY.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article was provided by our partner Tom Lydon of etftrends.com.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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