This article is going to focus on a popular dividend ETF, iShares Dow Jones Select Dividend (DVY). This is a select fund and consists of 100 of the highest dividend-yielding securities in the Dow Jones U.S. Index. This is a solid number because, while lower than the amount of stocks you would own in many mutual fund options, 100 stocks is definitely a limit where you can call yourself "diversified". Another benefit is that currently large cap stocks are doing very well, especially since January '12. Having these large players allows you to take advantage of this trend, but also exposes you internationally because most of the DOW companies do business across the world.
The fund is made up almost entirely of US stocks, with 99% of the stocks coming from the US of A, but these are indeed companies that generate significant income from overseas. Here is a look at the top 10 holdings of the fund (as of 4/9/13):
|Name||% of Fund|
|LORILLARD INC (LO)||3.55%|
|LOCKHEED MARTIN CORP (LMT)||2.71%|
|CHEVRON CORP (CVX)||2.18%|
|ENTERGY CORP (ETR)||1.97%|
|MCDONALD'S CORP (MCD)||1.94%|
|KIMBERLY-CLARK CORP (KMB)||1.91%|
|INTEGRYS ENERGY GROUP INC (TEG)||1.69%|
|CLOROX COMPANY (CLX)||1.64%|
|WATSCO INC (WSO)||1.56%|
|DTE ENERGY COMPANY (DTE)||1.55%|
While companies like McDonald's have struggled recently BECAUSE of their international (especially European exposure), my point is that you are exposed to more than just the US market, so you will not be left out of a run-up (or decline) because of international factors.
The fund is also heavily weighted towards utilities and industrials, which comprise over 45% of the fund. This is a bit overweight in these areas, so investors would be hit particularly hard if these sectors trend downwards. However, these are notoriously reliable sectors with steady cash flows and high comparable dividend yields. That indicates to me that the dividend payout of DVY is on the safer side with little risk to being cut. Another large portion of the fund is weighted towards financials, at about 10%. While financials used to have similar characteristics in that they had steady cash flow and juicy yields, this has not been the case for some time. I personally would like to see this index weighted less towards financials, but banking stocks have down exceptionally well over the last year, and that has helped DVY generate impressive gains. While this has been a positive in the short-term, this is one of the more riskier parts of the DVY, and this exposure links the fund to troubles in Europe more than any other component.
The recent performance of DVY speaks for itself. Year to date the stock is up over 11%. It has also been a very reliable trend upwards, minor pullbacks have not existed for very long and over the last year the stock has returned almost 15%, excluding dividends. The fees are also reasonable, with an expense ratio of .40. Given that DVY has many of the benefits of a standard mutual fund, with its payout and diversification, and mutual funds typically charge in the 1-2% range annually, DVY is a cheaper way to hold a large number of stocks.
While these returns are most impressive, the dividend payout of DVY is also attractive. Given the run-up, the yield is lower now than when I started investing, but it stands today at 3.43%. It goes without saying with this low-rate environment, such a yield is attractive, especially given the capital appreciation that has accompanied it. The ETF also trades at under 9 times earnings and has a beta or .87. These stats indicate the ETF is less volatile than the market and trades at a very reasonable valuation, making it a relatively safe investment.
Compared to another ETF favorite of mine, SDY, the DVY seems to beat it out in some key areas. Its yield is higher, has roughly the same beta, and trades at a lower earnings multiple. That being said, SDY has outperformed DVY over the last year, one of the reasons why the yield is currently lower. Furthermore, DVY, as mentioned earlier, is comprised of 100 different stocks, while SDY consists of fewer. This means the DVY fund is more diversified and, hopefully, safer. SDY is still a very safe investment option because the criteria to belong to that fund is much stricter than DVY. For SDY, rather than simply being a large-cap dividend payer, companies must exhibit a history of increasing dividends for the past 25 years.
The key takeaway here: If you are looking for growth, stability, and a dividend payout that has remained steady over the last year, DVY seems to fit the bill. Those who have bought in during any pullback have been rewarded handsomely. The fund's dividend also seems very safe because it has never suspended its dividend. The fact that now many large, U.S. companies are flush with cash and have shown few signs of willingness to decrease their dividend payouts, speaks to its reliability. Given today's decrease in the market, now could be a great time to initiate a position.