Though some concerns have dampened the appeal of dividend stocks
and ETFs over the past couple of months, investors are still
praising the space thanks to the Fed’s decision to hold off on the
taper.
Further, with the appointment of Janet Yellen as the likely next
Fed Chairperson, many are speculating that easy monetary policies
might be kept intact. As such, many are starting to believe that
lower rates could prevail longer than expected, compelling
investors to return to the dividend space (read: Yellen as Fed
Chairwoman is Great News for These ETFs).
Faster Dividend Growth
Over the longer term (say over the past 80 years), dividends have
accounted for more than 40% of total returns. The number of
companies paying dividend in the S&P 500 has risen to 83%, the
highest level seen in 15 years. The payout ratio stands at 31.8%,
the highest since mid 2010.
As per S&P, dividend net increases (increases less decreases)
grew 8.2% during Q3 as 475 companies reported dividend hikes. The
trend is expected to continue in the coming months as most large
companies have huge cash piles on their balance sheet and are in a
position to increase payouts to shareholders.
Currently, investors are optimistic on high growth sectors like
technology and finance on improving global economies and consistent
increase in dividends. Over the past one year, technology has been
the best dividend paying sector in the S&P 500 and would
continue to lead the way higher (read: No Taper? No Problem for
These Dividend ETFs).
How to Play
In such a backdrop, investors are again cycling their exposure to
the dividend space as a way to achieve equity appreciation with a
lower level of risk. The ETFs with a dividend-growth focus are
expected to perform better over the long term compared to funds
that focus on high dividend yields (see: all the Large Cap ETFs
here).
Below, we have highlighted four dividend ETFs that offers excellent
dividend growth potential, any of which could be a solid pick for
investor in the long term:
SPDR S&P Dividend ETF
(SDY)
This fund provides exposure to the 85 U.S. stocks that have been
consistently increasing their dividends every year for at least 25
years. This is done by tracking the S&P High Yield Dividend
Aristocrats Index.
SDY is easily one of the most popular and liquid ETF in the
dividend space with AUM of over $12.4 billion and average daily
volume of less than one million shares. The product is widely
diversified across sectors and securities.
Each security accounts for less than 2.62% of total assets, with
AT&T (T), HCP Inc. (HCP) and Consolidated Edison as the top
three firms. The highest sector allocations go to consumer staples
(17.81%), financials (16.96%) and industrials (14.10%).
The fund charges 35 bps in fees per year and yields 2.35% in 30-day
SEC terms. The ETF has added nearly 22.7% so far this year.
Vanguard Dividend Appreciation ETF
(VIG)
This is the largest and most popular ETF in the dividend space with
AUM of $17.45 billion and average daily volume of more than 1.1
million shares. The fund follows the Dividend Achievers Select
Index, which is composed of stocks of high quality companies that
have a record of increasing dividends for at least 10 years.
Holding 146 stocks in its basket, the product is pretty spread out
across various securities as none holds more than 4% of total
assets. PepsiCo (PEP), Procter & Gamble (PG) and Wal-Mart
Stores (WMT) are the top three elements in the basket. However,
from a sector look, the ETF is heavily weighted toward consumer
goods (23%), industrials (22%) and consumer services (16.50%).
With an expense ratio of 0.10%, VIG is one of the cheapest funds in
this space. The 30-day SEC yield comes at 2.11%. The fund has
gained nearly 21.2% in the year-to-date time frame (read: 4
Unbeatable ETF Strategies for Q4).
WisdomTree U.S. Dividend Growth ETF
(DGRW)
This fund tracks the WisdomTree U.S. Dividend Growth Index and
offers diversified exposure to 294 dividend-paying stocks from
various sectors with growth characteristics. It has gathered $56.1
million in AUM since its debut earlier in the year and it trades in
volumes of nearly 43,000 shares per day.
The product provides double-digit allocation to four sectors –
industrials (20.62%), information technology (20.49%), consumer
discretionary (19.79%) and consumer staples (18.09%). Apple (AAPL),
Microsoft (MSFT) and PG are the top three holdings making up for a
combined 12.82% share (read: 3 ETFs to Watch on Microsoft Dividend
Hike).
The fund has a 30-day SEC yield of 2.04% and charges 28 bps in fees
per year from investors. DGRW is up 8.4% since inception.
First Trust NASDAQ Technology Dividend Index
(TDIV)
Since the technology sector is expected to be a major contributor
to the overall increase in dividends, investors could find TDIV an
intriguing option. This fund seeks to focus on dividend payers
within the technology sector by tracking the Nasdaq Technology
Dividend Index.
The fund has accumulated $215.2 million in its asset base and
trades in volume of roughly 92,000 shares a day on average. In
total, the fund holds 87 securities in its basket. Intel (INTC),
MSFT and International Business Machines (IBM) occupy the top three
positions in the basket with nearly 24% of assets.
In terms of sector exposure, about one-fourth of the portfolio is
tilted toward semiconductor and semiconductor equipment while
software, and computer and peripherals make up for 14% share
each.
The ETF sports a 30-day SEC yield of 2.90% and has an expense
ratio of 0.50%. TDIV gained 20% so far this year.
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WISDMTR-US DV G (DGRW): ETF Research Reports
SPDR-SP DIV ETF (SDY): ETF Research Reports
FT-NDQ TECH DIF (TDIV): ETF Research Reports
VANGD-DIV APPRC (VIG): ETF Research Reports
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