S&P Bullish on an Array of Dividend ETFs

In the first quarter, there were over 700 dividend increases by companies listed on U.S. exchanges, indicating that 2013 is shaping up to be another great year for income investors. On a related note, investors continue to put cash to work in dividend ETFs.

Inflows to U.S. and non-U.S.-listed dividend funds reached $3 billion in March alone, according to iShares data.

Many dividend ETFs feature sizable allocations to defensive sectors such as consumer staples, health care and utilities. Those are the sectors that have have been leading the market higher as pensive retail investors embrace the themes of low volatility of decent dividends.

"Further supporting the pro-defensive theme is that during the first quarter investors added $6.1 billion to U.S.-listed dividend income exchange-traded products, with $2.4 billion in March alone," said S&P Capital IQ in a new research note. "This is a continuation of the trend that occurred in 2012, when $12 billion was added to these products. There is now $68.5 billion invested in these products as of March 2013."

In the note, S&P Capital IQ evaluated five well-known dividend ETFs, including the SPDR S&P Dividend ETF (NYSE:SDY). SDY, with $11.3 billion in assets under management, is the second-largest dividend ETF by that metric behind the Vanguard Dividend Appreciation ETF (NYSE:VIG). S&P rates SDY Overweight.

SDY has a 30-day SEC yield of 2.55 percent and an annual expense ratio of 0.35 percent. As is the case with several of the larger, more well-known dividend ETFs, SDY uses length of dividend increase streaks as its primary weighting methodology. The ETF tracks the S&P High Yield Dividend Aristocrats Index (SPHYDATR), which requires a company to have 25 consecutive years of increased dividends for inclusion in the index.

The methodology has worked this year as SDY is up 15.3 percent. Top-10 holdings include serial dividend raisers such as AT&T (NYSE:T), Kimberly-Clark (NYSE:KMB), Clorox (NYSE:CLX) and Johnson & Johnson (NYSE:JNJ).

S&P also has an Overweight rating on the Vanguard High Yield Dividend ETF (NYSE:VYM). VYM, with an low expense ratio of just 0.1 percent, has a yield of nearly three percent. VYM tracks the FTSE High Dividend Yield Index, which measures the investment return of common stocks of companies characterized by high dividend yields, according to Vanguard.

VYM's top-10 holdings at the end of February included Exxon Mobil (NYSE:XOM), General Electric (NYSE:GE) and Johnson & Johnson. All of the ETF's top-10 holdings are Dow components. The fund is up 13.7 percent year-to-date.

Also earning an S&P Overweight rating was the Schwab U.S. Dividend Equity ETF (NYSE:SCHD), the low cost leader among dividend ETFs with a paltry annual fee of just of 0.07 percent. SCHD is heavy on consumer staples (28.5 percent) though light on utilities (1.9 percent). Home to 102 stocks, SCHD is larger than SDY on that basis, but nowhere close to the 430 holdings found in VYM.

SCHD, which has a 30-day SEC yield of 2.95 percent, has a year-to-date gain of 14.3 percent, putting it in the middle of the five ETFs highlighted in the S&P note. Nine of SCHD's top-10 holdings are Dow components with PepsiCo (NYSE:PEP) being the outlier. Other top-10 constituents include Microsoft (NASDAQ:MSFT), Johnson & Johnson and Exxon.

The WisdomTree Equity Income Fund (NYSE:DHS) also earned an Overweight rating from S&P. DHS has previously been highlighted as a viable alternative to dividend ETFs that focus on increase streaks.

DHS tracks the WisdomTree Equity Income Index (WTHYE), which 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.

Health care, staples and utilities represent over 43 percent of the ETF's weight. DHS has an annual expense ratio of 0.38 percent, among the highest in this group. However, DHS is tied with SDY as the best performer this year of the five dividend ETFs S&P evaluated, but DHS has also been 100 basis points less volatile than SDY.

Top-10 holdings in DHS include AT&T, Microsoft, Chevron (NYSE:CVX) and Verizon (NYSE:VZ). The 30-day SEC yield on DHS is 3.52 percent.

The iShares High Dividend Equity Fund (NYSE:HDV), which just celebrated its second birthday, also garnered an Overweight rating from S&P. Home to 75 stocks, HDV has an expense ratio of 0.4 percent, making it the most expensive of the five ETFs mentioned here.

HDV is light on staples (just 3.81 percent), but heavy on health care and telecommunications as those two sectors combine for 41 percent of the ETF's weight. The fund currently has a 30-day SEC yield of 3.24 percent. HDV is up 15 percent this y year, putting it just behind SDY and DHS.

Top-10 holdings in the iShares offering include AT&T, Microsoft, Chevron and Verizon.

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