Dividend ETFs Remain In Style

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 |  Includes: DTD, DVY, SPHD
by: Tom Lydon

Summary

Dividend ETFs remain a mainstay in investor portfolios.

Some dividend ETFs that outperformed the S&P 500.

A closer look at the indexing methodology and why dividend ETFs are stronger.

By Todd Shriber & Tom Lydon

Dividend increases among U.S. companies rose $12.6 billion in the April through June time frame, but that lags the $17.6 billion growth rate seen in the first quarter, according to S&P Dow Jones Indices.

According to S&P Dow Jones Indices, 696 dividend increases were reported during the second quarter of this year compared to the 591 increases which were reported during the second quarter of last year. For the first half of 2014, 1,774 issues increased their payments, up 15.6% from the 1,535 issues that increased their payments during the first half of 2013.

Those statistics fortify the notion that dividend stocks and the exchange traded funds that hold them remain favored by investors. Reports Matt Jarzemsky for the Wall Street Journal:

Mutual funds focused on some of these yield-oriented sectors have attracted greater interest from investors this year. In 2014 through May, utility and energy limited-partnership-focused funds in the U.S. brought in $6.08 billion in new investor cash, up from $4.21 billion in the year-earlier period, according to fund tracker Morningstar.

After a lethargic start to 2014, dividend stocks and ETFs resumed out-performance of the S&P 500 in late February, about the same time that momentum offerings, such as biotechnology and Internet names, fell out of favor.

The S&P 500 entered Tuesday with a 2014 gain of 8%, but the benchmark U.S. index has been topped by several high-yield dividend ETFs. Year-to-date, the iShares Select Dividend ETF (NYSEARCA:DVY) has slightly outpaced the S&P 500 while the PowerShares S&P 500 High Dividend Portfolio (NYSEARCA:SPHD) has surged nearly 12%.

The out-performance of DVY, SPHD and other high-yield payout ETFs has been attributed to the weight of those funds to the utilities sector, which is the best performer in the S&P 500 this year. DVY, one of the four largest U.S. dividend ETFs, has a 34.5% to the utilities sector. SPHD's allocation to utilities is 26.5%.

DVY, with a trailing 12-month yield of almost 3%, has added $547.5 million in new assets this year while SPHD has added almost $9 million of its $166.1 million in assets this year. SPHD tracks the S&P 500 Low Volatility High Dividend Index, which is comprised of 50 stocks taken from the S&P 500 that have historically exhibited high dividend yields and low volatility. The Journal reported, citing Morningstar:

Mutual funds focused on some of these yield-oriented sectors have attracted greater interest from investors this year. In 2014 through May, utility and energy limited-partnership-focused funds in the U.S. brought in $6.08 billion in new investor cash, up from $4.21 billion in the year-earlier period.

Still, not all dividend ETFs that are delivering solid returns are utilities-heavy. For example, the WisdomTree Total Dividend Fund (NYSEARCA:DTD) is up 8.2% this year with just a 6.5% utilities allocation.

The $464.1 million DTD, which like SPHD pays a monthly dividend, is a bet on future sources of dividend growth with a combined 32.4% weight to the financial services and technology sectors. Not only are those of the largest sources of S&P 500 dividend growth over the past several years, those sectors provide a buffer for DTD in the event that interest rates rise.

According to Factset data, at the end of the first quarter the 10 largest dividend payers in the S&P 500 were: Exxon Mobil (NYSE:XOM), Apple (NASDAQ:AAPL), AT&T (NYSE:T), Microsoft (NASDAQ:MSFT), General Electric (NYSE:GE), Chevron (NYSE:CVX), Johnson & Johnson (NYSE:JNJ), Wells Fargo (NYSE:WFC), Procter & Gamble (NYSE:PG) and Pfizer (NYSE:PFE). Those stocks just happen to comprise DTD's top-10 holdings.

DTD charges 0.28% per year and has a distribution yield of 2.5%.

WisdomTree Total Dividend Fund

Click to enlarge

Tom Lydon's clients own shares of Apple, Microsoft, P&G and DVY.

Disclosure: The author is long AAPL, MSFT, PG, DVY. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.