A Winning Dividend ETF Idea For March


With interest rates forecast to rise and the energy sector home to a spate of cuts and suspensions, expectations were in place for a trying year for dividend stocks and exchange traded funds. The opposite has proven true as investors' thirst for safer assets has buoyed some dividend ETFs.

That and the fact that for every one negative dividend action this year that has been nine increases among S&P 500 member firms. A mini-resurgence among dividend ETFs has helped lift the Vanguard Dividend Appreciation ETF (NYSE:VIG), the largest U.S. dividend ETF by assets, to a gain of 0.6 percent. Not great, but still better than 2.4 percent loss posted by the S&P 500.

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Long-term sturdiness and a 0.1 percent annual fee that makes it less expensive than 90 percent of rival funds are among the reasons VIG is S&P Capital IQ's focus ETF for the month of March.

While a handful of energy and materials dividend cuts have made understandable headlines in the first nearly two months of 2016, according to Howard Silverblatt an index analyst with S&P Dow Jones Indices, 82 companies had raised their dividends year to date through February 18. Some of these companies are constituents in VIG and have a long history of increases, said the research firm in a note out Wednesday.

The $18.8 billion VIG follows the NASDAQ US Dividend Achievers Select Index, a benchmark that mandates constituents have a minimum dividend increase streak of at least 10 years. That mandate means VIG allocates just 24.6 percent of its weight to technology and financial services stocks. Many financials cut dividends during the financial crisis, making them ineligible for inclusion in VIG while the concept of tech dividends is still relatively new.

A significant chunk of VIG's tech exposure is devoted to Dow components Microsoft Corporation (NASDAQ:MSFT) and International Business Machines Corp. (NYSE:IBM). Other top 10 holdings in the ETF include Johnson & Johnson (NYSE:JNJ) and 3M Co. (NYSE:MMM).

With its emphasis on consistent dividend growers, VIG delivers to investors a play on the quality factor as well companies that are prodigious generators of free cash.

"3M raised its dividend by 8 percent in February 2016, making it the 99th consecutive year of uninterrupted payments. The industrial conglomerate earns an above-average S&P Quality Ranking of A+ for its consistent earnings and dividend records. Jim Corridore, S&P Global Market Intelligence equity analyst see MMM's 2016 sales growth up 1.0%, with organic local currency growth across all segments: Industrial (+1%), Healthcare (+2%), Consumer (+2%), Safety & Graphics (+2%) and Electronics & Energy (+2%). With an annual dividend of $4.44/share, MMM sports a 2.8% dividend yield that is well supported by free cash flow, adds S&P Capital IQ.

Additionally, VIG's interest rate risk is muted by scant allocations to rate-sensitive telecom and utilities stocks.

Disclosure: The author owns shares of JNJ.

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