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 their holdings."
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 (DVY), the WisdomTree Dividend ex-Financials Fund (DTN) and the WisdomTree Equity Income Fund (DHS).
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 (T), General Electric (GE) and Merck (MRK).
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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