Are U.S. Dividend Stock ETFs Overvalued?

Jun. 3.13 | About: SPDR Dividend (SDY)

Dividend stocks have been favored by investors for quite a while due to the low yield environment. Many popular dividend stocks have performed well and so have a range of dividend ETFs. In a previous article, I noted that SPDR S&P Dividend ETF (NYSEARCA:SDY) had outperformed the broader SPDR S&P 500 ETF (NYSEARCA:SPY). SDY offers a higher dividend yield as well. However, there is an increasing concern about whether dividend stocks are becoming overvalued.

I first asked this question back in August of 2012. Forbes published a piece two days later asking a similar question. However, since that time SPY has increased 17.3% and SDY has appreciated 19.3%. A Google search will show many more articles on the topic with some from the early parts of 2012, but clearly the chorus is growing. Furthermore, the sell in May and go away crowd would note that just recently, stocks have pulled back. SDY is now down 3.9% from its high close on May 21, 2013 of $70.22 per share.

This analysis will also look at iShares Dow Jones Select Dividend Index (NYSEARCA:DVY) and Vanguard High Dividend Yield ETF (NYSEARCA:VYM). The following table shows some basic information for each ETF.

Dividend ETFs

Ticker Name Recent Price TTM Yield TTM Dividend
SPY S&P 500 Index Trust ETF 163.45 1.9% 3.18
SDY SPDR S&P Dividend ETF 67.50 2.8% 1.86
DVY iShares Dow Jones Select Dividend Index 64.63 3.4% 2.18
VYM Vanguard High Dividend Yield ETF 56.87 2.9% 1.63
Click to enlarge

Source: Yahoo!Finance, Author calculations

Dividend ETFs tend to have lower betas

The first key point is that these dividend ETFs tend to have lower betas than the market as a whole - which is typically at a 1. This is significant since, if you adhere to efficient markets theory, they have less systematic risk and thus should ultimately earn a lower return. Part of efficient market theory is that you only earn returns based upon your exposure to the broader market. The following table shows the calculation of beta for these stocks.

Implied Beta of Dividend ETFs

Ticker Correlation 36 months Volatility 36 months Ratio Implied Beta
SPY 100% 3.9% 1.0x 1.00
VYM 95% 3.2% 0.8x 0.78
SDY 92% 3.2% 0.8x 0.77
DVY 88% 2.9% 0.8x 0.66
Click to enlarge

Source: Yahoo!Finance for split and dividend adjusted monthly prices, Author calculations

These ETFs tend to have lower volatility despite relatively high correlations to SPY. This results in a lower beta. A lower beta corresponds to a lower expected return when applying the capital asset pricing model. Hence, looking forward, one should in general expect a lower return on these types of ETFs relative to the market.

Dividend ETFs have shown better returns than SPY

However, this has not been the case recently. The following table shows a range of returns (dividend adjusted) for these ETFs in comparison to SPY.

ETF Returns

Ticker 1 Year Return 2 Year Return 3 Year Return 5 Year Return
SDY 27.7% 30.1% 58.9% 50.3%
VYM 27.1% 32.1% 68.1% 37.4%
SPY 27.1% 26.5% 59.1% 29.8%
DVY 22.2% 28.5% 63.2% 109.6%
Click to enlarge

Source: Yahoo!Finance for split and dividend adjusted monthly prices, Author calculations

This table shows that SDY has outperformed the market over the past year, 2 year, and 5 year period. It slightly lagged over 3 year. VYM has outperformed over all time periods. DVY has really outperformed for each period except the 1 year.

Valuation Metrics Appear High for the Dividend ETFs

So the first two main points seem to indicate that dividend ETFs have been outperforming the market, when you actually should expect them to underperform the market by a little bit. This might be possible if they had been previously undervalued. However, in looking at some metrics, it would appear that SDY is no longer undervalued.

Valuation Metrics

Ticker Price/ Earnings Price/ Book
SPY 14.8x 2.0x
SDY 16.4x 2.6x
VYM 12.7x 2.2x
DVY 14.6x 2.0x
Click to enlarge

Source: Yahoo!Finance,, iShares website,, author calculations.

So it seems that SDY is not undervalued, but one might be able to make a case for VYM and DVY. The key consideration would be to look at potential growth. In my previous article, I showed that SDY's dividends/earnings appear to be growing more slowly than SPY's.

Bottom Line

It would appear that SDY is somewhat overvalued. The P/E ratio is about 11% higher than SPY. In contrast, DVY looks quite similar to SPY, but carries a much lower beta. DVY also offers the most attractive dividend yield based on a TTM basis.

My somewhat recent purchase of SDY does not look so great. This analysis suggests that both VYM and DVY appear to be better options. I even noted VYM as being more interesting than SDY in an earlier article.

Disclosure: I am long SDY, SPY. 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 may initiate a long position in DVY and VYM in the next 72 hours.