Cashing In With Dividend Stock ETFs

Includes: DHS, INTC, SDY, SPY, T, VYM, XLU
by: Bennington Investment Ideas

In the search for yield, ETFs focused on dividend paying stocks can provide extra income beyond that of broader market ETFs. This article will look at some options and provide comparisons to SPDR S&P 500 Trust ETF (NYSEARCA:SPY). From a personal point of view, I'm wondering if I would be better served by taking positions in one or more of these ETFs in lieu of some of my current position in SPY.

It should be noted that the purpose is to look at broad ETFs and not individual stocks. While selection of individual stocks might provide greater dividend yields and even higher potential price appreciation, it also requires much more individual stock analysis that not all investors have the time to or interest in performing. This article will focus on the following ETFs:

Select Dividend Stock ETFs

Ticker Name AUM ($ B) Recent Closing Price TTM Yield
SPY S&P 500 Index Trust ETF 129.8 157.41 2.0%
DLN WisdomTree Large Cap Dividend Fund 1.5 59.45 2.8%
VYM Vanguard High Dividend Yield ETF 7.5 55.35 2.9%
SDY SPDR S&P Dividend ETF 11.0 66.26 2.8%
DHS WisdomTree High-Yielding Equity Fund 0.6 52.06 3.6%
XLU Utilities Select Sector SPDR 6.0 40.23 3.6%

Source: Yahoo!Finance

The above chart shows some clear contrasts in terms of Assets under Management (AUM) among the ETFs as well as a range of yields from the low of 2.0% for SPY to a high of 3.6% for Utilities Select Sector SPDR (NYSEARCA:XLU) and WisdomTree High Yielding Equity Fund (NYSEARCA:DHS). However, as noted earlier, there are a wide variety of blue chip stocks that offer even higher yields, including Intel Corp. (NASDAQ:INTC) with a 4.0% TTM yield and AT&T (NYSE:T) with a 4.7% TTM yield.

Dividend Stock ETFs offer Lower Volatility

Another point of comparison of these ETFs would be around risk profile. The goal is to not designate whether they have high or low risk profiles, but how they compare to SPY. The following chart looks at the correlation and volatility of these ETFs.

Correlation, Volatility, and Beta

Ticker Correlation 36 months Volatility 36 months Ratio Implied Beta
SPY 100% 4.0% 1.0x 1.0
DLN 97% 3.2% 0.8x 0.8
VYM 96% 3.3% 0.8x 0.8
SDY 93% 3.3% 0.8x 0.8
DHS 86% 2.8% 0.7x 0.6
XLU 45% 2.5% 0.6x 0.3

Source: Data from Yahoo!Finance for split and dividend adjusted monthly prices. Author Calculations

This is actually an interesting table for comparing these ETFs. First, with the exception of XLU, all the ETFs are highly correlated to SPY. So when SPY goes up, so do the others and when SPY goes down, the others follow. The next observation is that these ETFs focused on dividend paying stocks carry lower volatility, by a substantial margin, ranging from 20% to 40% less. Hence, their beta is correspondingly lower with XLU at just 0.3. For adherents to the capital asset pricing model, this means that the expected returns should be lower. However, recent historical performance (including dividends) shows otherwise.

Historical Total Returns

Ticker 1 Year 2 Year 3 Year 5 year
SPY 13.4% 18.7% 39.0% 25.0%
SDY 18.8% 25.5% 43.1% 45.3%
DHS 18.5% 31.6% 61.8% 26.7%
VYM 16.6% 26.3% 49.0% 32.0%
XLU 16.0% 28.7% 46.3% 20.1%
DLN 14.4% 24.2% 48.7% 23.5%

Source: Data from Yahoo!Finance for split and dividend adjusted monthly prices. Author Calculations

All these ETFs have outpaced SPY over the first three time periods and are comparable or better over the five-year time frame. Note that five-year returns begin before the financial crisis. This also highlights the return of the stock market since that time. However, dividend yields are only 1-1.5% higher for these ETFs than SPY, suggesting that the underlying stocks have appreciated by even more. For example, SPDR S&P Dividend ETF (NYSEARCA:SDY) has a one year total return that is 5.4% higher than SPY, despite a dividend yield that is less than 1% higher. This means that its stocks have risen by an average of 4.4% more than SPY.

Potential Expansion in Valuation Multiples

The following table compares these ETFs to SPY across a few common valuation multiples, including PE ratio, price to book, and price to sales.

Valuation Metrics

Ticker Price/ Earnings Price/ Book Price/ Sales Price/ Cash Flow
SPY 14.3x 2.0x 1.4x 7.2x
SDY 16.5x 2.6x 1.1x 9.1x
DHS 14.7x 2.1x 1.5x 7.5x
VYM 12.7x 2.2x 1.2x 6.7x
XLU 16.2x 1.6x 1.6x 6.3x
DLN 13.6x 2.1x 1.3x 6.8x

Source: Yahoo!Finance

The interesting thing is that you actually see a wide range of multiples across these different valuation metrics. Price to sales varies from a low of 1.1 for SDY to a high of 1.6 for XLU. XLU also has the lowest cash flow multiple, which is not unexpected. However, the Vanguard High Dividend Yield ETF (NYSEARCA:VYM) has a low 6.7x cash flow multiple and a the lowest P/E multiple at 12.7x. With the exceptions of SDY and XLU, the price-to-book multiples are quite similar. In comparison to SPY's P/E of 14.3x, the other ETFs average a 14.7x which suggests that some of the return might have been from multiple expansion. However, VYM also outperformed SPY over all time periods and it boasts a multiple that is 1.6x lower. These range of multiples also suggest different composition of underlying stocks.

These ETFs have variations in sector composition

The following table shows the distribution of sectors within each ETF. Of course, XLU is essentially 100% utilities.

Sector Focus by ETF

Consumer Defensive 19.3 15.3 14.4 20.1 10.5
Industrials 13.4 4.6 11.2 17.8 10.9
Energy 13.2 8.8 11.0 5.3 11.0
Healthcare 12.7 15.4 11.8 9.6 12.4
Financial Services 10.4 4.4 9.9 10.0 14.7
Utilities 7.9 13.4 6.0 7.3 3.5
Technology 7.7 10.7 13.2 2.2 16.5
Communication Services 6.0 12.1 7.2 3.3 4.3
Consumer Cyclical 5.8 4.4 8.8 12.2 11.1
Basic Materials 3.8 3.5 3.5 7.2 3.1
Real Estate 0.0 7.6 3.1 5.2 2.1

Source: Yahoo!Finance. Figures reflect % of AUM.

One can see distinct differences across the ETFs. In fact, the maximum portion was more than 10 percentage points higher than the minimum portion in three different sectors. There were several other sectors in which this spread was almost 10 percentage points. For example, VYN had 13.2% of its assets in energy, while SDY was just at 5.3%. Also SDY had almost no technology exposure, while the broader SPY is 16.5% technology.


For an investor seeking a greater orientation to income, some of these ETFs might be good substitutes for SPY. While there are different risks from varying sector profiles, the ETFs still track SPY quite closely as noted earlier by the high correlation coefficients. Furthermore, the ETFs also boast in some cases lower valuation multiples than SPY. In particular, I find VYM to be most interesting.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in VYM over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security. I am long SPY.