The purpose of this article will focus on the differences between the ("SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA)") and the ("iShares Dow Jones Select Dividend (NYSEARCA:DVY)") and attempt to determine which investment would be more appropriate for investors. The DVY is a very popular investment right now, and it is an ETF that I have regularly discussed and invested in, but I am going to compare its make-up and performance to another ETF, the DIA, which also seeks to track the Dow Jones performance.
First, a little about DIA. It is an ETF which issues securities called trust units. It seeks to provide investment results that generally correspond to the price and yields performance of the Dow Jones Industrial Average. The Dow is an index of 30 blue chip United States stocks and is one of the most important gauges of overall market performance across the world. Investors can trade the DIA with standard buying, short selling, or through options. The DIA currently is at just under $147/share and pays a monthly dividend of $.14/share, yielding 2.30% annually. Its beta is .89, which seems counterintuitive because you would think the beta would be 1 since it tracks the Dow, which is what stocks / funds are compared to when determining their betas.
However, the DIA is not an identical investment as investing in the "Dow". DIA is currently made up of 32 holdings, all of which have different weightings. Some of the top holdings of the DIA have much lower betas relative to the Dow, so it brings the overall beta down, representing an investment that has lower volatility than the market as a whole. Here is a list of some of the fund's top holdings as of 04/25/2013:
|Chevron Corp New (NYSE:CVX)||6.19%||6,300,209|
|3M Co (NYSE:MMM)||5.48%||6,300,209|
|United Technologies (NYSE:UTX)||4.81%||6,300,209|
|Boeing Co (NYSE:BA)||4.79%||6,300,209|
|Exxon Mobil Corp (NYSE:XOM)||4.60%||6,300,209|
|Johnson & Johnson(NYSE:JNJ)||4.45%||6,300,209|
|Travelers Companies (NYSE:TRV)||4.45%||6,300,209|
|Caterpillar Inc (NYSE:CAT)||4.41%||6,300,209|
Now, a little on the DVY, and then I will attempt to compare the two. The DVY is a select fund that consists of 100 of the highest dividend-yielding securities in the Dow Jones U.S. Index. I recently wrote an article on the DVY that can be found here. DVY currently trades at just under $65/share, with a quarterly dividend of $.56/share that yields around 3.36% annually. Here is a list of the top holdings of the fund as of 4/25/2013:
|Name||% of Fund|
|LORILLARD INC (NYSE:LO)||3.60%|
|LOCKHEED MARTIN CORP (NYSE:LMT)||2.74%|
|CHEVRON CORP (CVX)||2.14%|
|ENTERGY CORP (NYSE:ETR)||1.96%|
|KIMBERLY-CLARK CORP (NYSE:KMB)||1.95%|
|MCDONALD'S CORP (MCD)||1.90%|
|INTEGRYS ENERGY GROUP (NYSE:TEG)||1.70%|
|CLOROX COMPANY (NYSE:CLX)||1.61%|
|DTE ENERGY COMPANY (NYSE:DTE)||1.60%|
|WATSCO INC (NYSE:WSO)||1.55|
As you can see from the top holdings charts, there are some key similarities and differences among the two. To compare recent performance, over the past year the DIA has returned almost 12%, excluding dividends. The DVY is up closer to 14%, excluding dividends. This is clearly a better performance, especially given the fact that the DVY has a higher yield and lower beta, at .87. However, I do like the fact that the DIA pays its dividends monthly. This gives investors their cash (or reinvested stock) at a faster pace, which is always desirable. However, I do not envy the volatility in the DIA's dividend payout. Since the start of the year the DIA has more than doubled its monthly payout, only to have it rest at a lower level than when it started. For example, from January to April the payouts were $.15/share, $.36/share, $.30/share, $14/share, respectively. Over the past 52 weeks there has been even more volatility, which makes it harder for investors to plan what they will receive, and continuously alters the attractiveness of the investment. In contrast, the DVY currently pays a dividend that is up 3.5% since the start of the year, and the payout has not fluctuated by more than $.7/share from quarter to quarter since the start of 2011.
Other metrics make it harder to differentiate the two, which is not surprising given that they track the same index in similar (albeit not identical) ways. The PE ratios are both in the 9 range, market caps are roughly similar, and both have similar levels of institutional investment.
My main takeaways are fairly straightforward. DIA seems to offer no additional benefit over DVY. While the monthly dividend payout is attractive, the lower yield and higher amount of volatility of the actual payment give me pause. Even though the DVY pays its dividend quarterly, it pays a higher amount with more regularity. I choose safety in this case. Additionally, DVY has outperformed the DIA and it is more diversified. With over 100 holdings as opposed to DIA's 32, the DVY gives investors higher amounts of diversification at no added price; the cost of buying and selling each of these securities should be the same through your broker.
The main differences comes in the sector breakdowns of the two funds. The DVY is concentrated in Utilities (at 30%), Consumer Goods, Industrials, and Financials. Its high reliance on utilities is one of the key reasons for its stable dividend, but this sector also has traditionally weak growth prospects and low price-to-book multiples. In a runaway market, the DVY may underperform, but in a flat or declining market it should outperform. Personally, I feel that the market will only trend slightly higher in the near-term, so this investment makes sense to me.
In contrast, the DIA's top four sectors are Industrials, Information Technology, Consumer Discretionary, and Health Care. Depending on the investor, these differences could sway your preference. For instance, I find DIA's exposure to the health care sector interesting. This could be attractive given the recent positive performance of many health care related stocks, including names such as UnitedHealth Group (NYSE:UNH) and Aetna (NYSE:AET). I personally think this is an attractive sector to be exposed to going forward, as the U.S. population ages and coverage expands to more people across the country.
Bottomline: Both the DVY and the DIA will do well if the market continues to perform strongly. The funds are closely related, trade at similar multiples, and have many of the same holdings. Your preference for one over the other should come down what sectors you prefer to be exposed to. However, overall I prefer DVY for its higher (and more stable) dividend yield, better market performance, and greater diversification through its larger number of holdings.