The Select Dividend ETF Can Go Higher

| About: iShares Select (DVY)

The purpose of this article is to determine the attractiveness of the iShares Dow Jones Select Dividend (NYSEARCA:DVY) as an investment option. I will review DVY's recent performance, current holdings, dividend yield and growth, as compared to other ETFs with similar objectives. I will then look at trends in the general market to attempt to determine where the ETF may be headed from here.

First, a little about DVY. The Fund seeks investment results that correspond with the price and yield performance of the Dow Jones U.S. Select Dividend Index. The Index is generally made up of companies with relatively high dividend yields and that have maintained these yields for a long stretch of time. At the time of writing, DVY is trading at $71.59/share and pays a quarterly dividend of $.55/share, which translates to an annual yield of 3.07%. Over the past 52 weeks the fund is up over 17%, excluding dividends, while over the same period the Dow Jones is up just over 16%. Because of its diversity and inclusion of only high dividend payers, DVY has had a very strong performance over the past few years and has actually outperformed the DJI recently. However, many stocks and ETFs have done very well in this bull market, so it is important to consider what investments will have the ability to hold up well in a volatile or declining market.

To start, I expect the market to generally trend higher in 2014. That being said, I do not expect a similar run as in 2013, but rather a slow progression upwards with regular downtrends, similar to what we have seen since the start of the year. I think this will be the case because of all the headwinds facing the market, such as rising interest rates, struggling emerging markets, and political instability in multiple regions around the world. However, corporate earnings are still strong for many U.S.-based companies and they continue to hold record amounts of cash, to the tune of almost $3 Trillion. Investors will want to position themselves to benefit from these reserves once they are eventually utilized, whether it be in the form of stock buybacks, higher dividend payouts, or increased merger and acquisition activity. Additionally, unemployment has been dropping across the U.S., a critical area for large U.S. companies, so a continued recovery in consumer spending and housing is likely to continue.

This environment makes me favor stocks that will do well in uncertain times, and DVY holds many of these stocks and sectors in its portfolio. Even given its impressive run, I still see the fund attracting investor interest given its low beta (.86), reliable dividend yield, and potential for capital appreciation. DVY is also one of the few ETFs that still sports a yield over 3%. Competing funds such as SDY and VIG have yields of 2.6% and 2.1%, respectively. While a yield that is .5-1% higher will not make an investor a fortune, I believe this physiological level of 3% will continue to draw in investors over the other funds. The reason for the higher yield has much to do with its holdings. Here is a list of the top 10 holdings of DVY, which comprise about 21% of the fund:

Holding Weight
Total 20.92%

As one can tell from its top holdings, DVY is made up heavily of utilities, industrials, and oil and gas stocks, as well as a high percentage in consumer goods and financials. While sectors such as utilities do not always out perform in a rising interest rate environment, I am willing to take this risk for two reasons. One, I do not see U.S. interest rates rising with a lot velocity and two, I am willing to forgo a bit of upside in good times for some downside protection in bad times. This strategy has held up well over the last 12-18 months, and I see no reason why it will not continue to do well throughout this year.

Bottom-line: DVY has performed very well, outperforming the Dow Jones, while paying a healthy, and rising, dividend to boot. Given the markets impressive run, it would be wise for investors to consider alternatives such as DVY, (if they are not already in them) as a way to protect against any volatility that could emerge if areas like the Ukraine or Venezuela start to upset the market. With a diversified portfolio of 100 stocks and an expense ratio of only .40%, DVY offer investors a chance to gain broad market exposure at a fraction of the cost of traditional mutual funds. I would advise investors to take a serious look at this fund for 2014.

Disclosure: I am long DVY. 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.