Published March 25, 2013
It is not unreasonable to say that many income investors already know that 2013 is shaping up to be a fine year on the dividend growth front.
For example, the U.S. dividend stream in cash terms currently stands at $342 billion, above the $329 billion seen in late November and well above the prior peak of $288 billion in November 2007, according to recent research from ETF sponsor WisdomTree.
With the number of dividend ETFs proliferating at a rapid clip, investors face myriad choices. And while abundant choice can be viewed as a good thing, not all dividend ETFs are created the same, leaving investors to ponder which funds are best suited for their individual investment objectives.
Among dividend ETFs, a familiar choice investors face is choosing between those funds that use length of dividend increase as the primary screening criteria and rival ETFs that use an alternative methodology. Other dividend ETF weighting methodologies currently include weighting by yield or dividends paid in cash terms.
Here is a look at the total returns, including paid dividends, of some of the most popular U.S.-focused dividend ETFs this year.
Heading into the start of trading Monday, the top-performing major dividend ETF was the SPDR S&P Dividend ETF (SDY). SDY, is the second-largest dividend ETF by assets under management, with over $10.8 billion. Home to 86 stocks, SDY tracks the S&P High Yield Dividend Aristocrats Index (SPHYDATR), which requires constituent companies to have raised dividends for at least 25 consecutive years.
SDY allocates over 19 percent of its weight to the consumer staples sector and does an admirable job of spreading its weight around as its largest holding receives an allocation of just 3.12 percent. Familiar top-10 holdings include AT&T (T), Clorox (CLX) and Johnson & Johnson (JNJ). Overall, it is hard to argue with the fact that SDY has jumped 12.8 percent this year.
Two other ETFs that use dividend increase as their primary screening metric have also performed well this year. The Vanguard Dividend Appreciation ETF (VIG) is the largest dividend ETF by assets and tracks an index that requires a minimum of 10 years of boosted payouts. The PowerShares Dividend Achievers Portfolio (PFM) also has a the decade minimum of higher dividends for its constituents.
VIG is up nearly 10 percent year-to-date while PFM has returned 10.6 percent. Looking at PFM, since it is arguably the unheralded member of this trio, the ETF has nearly $286 million in assets and an expense ratio of 0.6 percent, well above the fees on SDY (0. 35 percent) and VIG (0.13 percent). PFM is another staples-heavy play as it allocates 24.7 percent to that sector.
Turning to some dividend ETFs that do things a little bit differently, the WisdomTree Equity Income Fund (DHS) has climbed 11.4 percent this year while being less volatile than all three of the aforementioned competitors.
DHS tracks an index that includes "securities ranking in the highest 30% by dividend yield are selected for inclusion. The index is dividend weighted annually to reflect the proportionate share of the aggregate cash dividends each component company is projected to pay in the coming year, based on the most recently declared dividend per share," according to WisdomTree.
DHS charges 0.38 percent per year and features many of the same holdings as PFM, SDY and VIG. However, DHS has an advantage over those funds because it pays a monthly dividend. That is good news for retirees looking for monthly income or those income investors looking to put the power of compounding to work for themselves faster.
In what is perhaps a surprise given the solid performance of the financial services sector this year, the WisdomTree Dividend ex-Financials Fund (DTN) checks in with a year-to-date gain of almost 11 percent while also being less volatile than SDY and VIG.
DTN, which also charges 0.38 percent per year and also features a monthly dividend, has one way of making up for the rally in bank stocks and restoration of that sector's dividends. The ETF's second-largest sector weight is technology at 13.15 percent. In dollar terms, technology is now the largest dividend sector in the U.S. and the one many analysts to be a primary driver of dividend growth going forward due to the strong balance sheets at many large-cap U.S. technology firms.
For those wondering, Apple (AAPL) is not a member of DTN's 85-stock lineup.
The PowerShares High Yield Equity Dividend Achievers Portfolio (PEY) cannot be ignored. The $307 million fund tracks an index that "is comprised of 50 stocks selected principally on the basis of dividend yield and consistent growth in dividends," according to the issuer.
Focusing on yield means PEY has a 30-day SEC of 4.22 percent, by far the best in the group mentioned here. It is also the second-best year-to-date performer behind SDY with a gain of 12.2 percent. PEY also pays a monthly dividend, but there is a trade-off. The ETF's yield bias and a 52.5 percent weight to small-caps means PEY is easily the most volatile fund mentioned here.
For more on dividend ETFs, click here.
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