A Survey Of Dividend Stock ETFs (Part 1)

by: Bennington Investment Ideas

Dividend stock ETFs provide a convenient way to obtain diversified exposure to above average dividend yielding stocks. Most ETF providers offer a variety of dividend stock ETFs, ranging from small cap to large cap from domestic to emerging market focuses. This series of articles will take a look at several dividend stock ETFs and assess their performance and characteristics to provide insights as to which ones might be most appropriate in different situations. The following ETFs will be reviewed:

Dividend Stock ETF
Ticker Name Family Inception Date
DLN WisdomTree Large Cap Dividend Fund WisdomTree 6/16/06
DTD WisdomTree Total Dividend Fund WisdomTree 6/16/06
DVY iShares Dow Jones Select Dividend Index Fund iShares 11/3/03
FDL First Trust Morningstar Dividend Leaders Index Fund First Trust 3/9/06
HDV iShares High Dividend ETF iShares 3/28/11
SCHD Schwab US Dividend Equity ETF Schwab 10/24/11
SDY SPDR S&P Dividend Aristocrats ETF SPDR 11/8/05
SPHD PowerShares S&P 500 High Dividend Portfolio PowerShares 10/18/12
VIG Vanguard Dividend Appreciation ETF Vanguard 4/21/06
VYM Vanguard High Dividend Yield ETF Vanguard 11/10/06

Source:Company websites

This list covers several different companies with 1-2 ETFs from each. These ETFs are focused on the U.S. market with a bias toward large capitalization stocks. Most of these ETFs have decent histories. However, Schwab US Dividend Equity ETF (NYSEARCA:SCHD), iShares High Dividend ETF (NYSEARCA:HDV) and PowerShares S&P 500 High Dividend Portfolio (NYSEARCA:SPHD) all have less than three years of history. Vanguard Dividend Appreciation ETF (NYSEARCA:VIG) is one of the largest ETFs with over $22 billion of assets. Its pair Vanguard High Dividend Yield ETF (NYSEARCA:VYM) has $10.3 billion in assets.

This first article will look at yield and potential for yield growth. Many investors look to yield as a partial indication of potential return. While stocks and ETFs may fluctuate in price, dividends have greater stability. The table below ranks these ETFs by their trailing twelve month dividend:

Dividend Stock ETF TTM Yield
Ticker TTM Dividend 1/3/2014 Closing TTM Yield
SDY 2.87 71.95 3.99%
SPHD 1.04 28.04 3.72%
HDV 2.23 69.50 3.21%
FDL 0.69 21.67 3.17%
DVY 2.19 70.37 3.11%
VYM 1.75 61.73 2.83%
SCHD 0.90 36.35 2.49%
DLN 1.60 65.94 2.43%
DTD 1.60 66.67 2.40%
VIG 1.39 74.62 1.86%

Source: Yahoo!Finance, author calculations

At first glance, it appears that SPDR S&P Dividend Aristocrats ETF (NYSEARCA:SDY) is perhaps the best pick for generating income in the upcoming year. However, there are two key considerations in evaluating yield. The first is that historical performance is not necessarily an indicator of future performance and second is that growth matters.

Dividend Stock ETF dividends can be lumpy

Most of these ETFs do not pay a consistent dividend, rather it is based upon a variety of factors driven primarily by the dividends paid by the ETF's holdings, which change over time. In contrast, many well known large cap stocks pay consistent dividends that are often increased every year by a relatively predictable amount.

One might have a second thought about SDY from examining its recent dividend history below:

SDY Dividend History
Ex-dividend Date Dividends TTM dividend Yearly Change TTM Dividend
12/20/2013 1.70 2.87 50%
9/20/2013 0.40 1.76 -4%
6/21/2013 0.42 1.83 2%
3/15/2013 0.36 1.86 6%
12/21/2012 0.58 1.91 10%
9/21/2012 0.48 1.83 6%
6/15/2012 0.45 1.79 3%
3/16/2012 0.40 1.76 1%
12/16/2011 0.51 1.74 -4%

Source: Yahoo Finance, author calculations

The most recent TTM dividend is almost a full dollar higher than all previous TTM dividend values. This should give investors pause. I would be surprised if the December 2014 dividend is as robust as the December 2013 dividend.

Dividend growth matters when projecting future dividends

The second consideration is that one should not expect the exact same payment next as this year. Reasonable expectations are that the coming year's payment would be higher. In fact, the Vanguard Dividend Appreciation ETF specifically targets stocks with high dividend growth, which should offset its lower current yield to some extent.

TTM Dividend Growth Rate
Ticker Current TTM Dividend 9/3/2013 TTM Dividend 1/3/2011 TTM Dividend CAGR (2011-Current)
SDY 2.87 1.83 1.36 28.2%
VYM 1.75 1.68 1.09 17.0%
VIG 1.39 1.45 1.05 9.8%
DLN* 1.60 1.66 1.24 8.9%
DVY 2.19 2.18 1.70 8.7%
DTD* 1.60 1.70 1.34 6.1%
FDL 0.69 0.76 0.58 5.9%
SCHD 0.90 0.89 0.00 NA
SPHD 1.04 0.88 0.00 NA
HDV 2.23 2.12 0.00 NA

Source: Yahoo Finance, author calculations *DLN and DTD converted from quarterly payments to monthly payments within the last 18 months. SCHD,HDV and SPHD have insufficient history for this analysis.

The key observation is that growth rates vary among ETFs. Furthermore, in looking at other years, the ranking of these growth rates can fluctuate as well. One can immediately notice that SDY's growth was driven by a single large dividend. Its growth would have been just 11.3% from 2011 to Q3 2013.

Next steps

This article was to introduce some of the Dividend Stock ETFs. Based on a combination of yield and growth both VYM and SDY look initially attractive. VIG's higher growth does not appear to be high enough to offset its lowest yield. It is also very important to note that this does not consider valuation and price appreciation potential. Furthermore, one can even ask the question are dividend stocks and by extension dividend stock ETFs currently attractive as overall investment opportunities. Today's still low interest rate environment may have driven investors to chase yield and artificially inflate dividend stocks.

Part 2 will look at portfolio considerations of including dividend stock ETFs and review differences among these ETFs.

Disclosure: I am long SDY, VYM. 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.