Dividend Stock ETFs: Achieving Alpha With Defense

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 |  Includes: DEM, DVY, EEM, EFA, FVD, IDV, IYR, PEY, PFF, PID, RWX, SDY, SPY, VIG, VYM
by: MyPlanIQ

Investors got a wake up call this week after the President's day: for the past two days, S&P has dropped 2.6%. We reviewed dividend stock ETFs performance in the following three equity classes:

  • U.S. Equity: U.S. dividend stock ETFs appeared resilient among the broader market correction. For the past one week, for example, Vanguard High Dividend Yield ETF (NYSEARCA:VYM) had the lowest loss: -0.68%, compared with SPY's 2.11% loss. In general, all broad U.S. dividend stock ETFs (SDY, FVD, DVY, VIG) outperformed the S&P 500 benchmark (NYSEARCA:SPY), showing that in general, dividend ETFs are more defensive during market stress.
  • International Equity: similarly, Powershwares International Dividend Achievers (NYSEARCA:PID) lost only 0.69%, compared with EFA's 2.07% loss in the last 5 days.
  • Emerging Market Equity: WisdomTree's Emerging Market Income (NYSEARCA:DEM) lost 1.57%, compared with EEM's 2.18% loss.

Preferred stocks showed the least loss (-0.48%) among all the dividend ETFs we monitored. For more detailed performance, please refer to here.

The following table shows the trend scores for dividend ETFs. U.S. REITs (NYSEARCA:IYR), U.S. stocks (SPY) and U.S. dividend stocks (VYM, VIG) are retaining the top spots. Emerging market equity (NYSEARCA:EEM) and preferred stocks (NYSEARCA:PFF) are still at the bottom.

Assets Class Symbols 02/23
Trend
Score
02/16
Trend
Score
Direction
iShares Dow Jones US Real Estate IYR 11.56% 14.05% v
SPDR S&P 500 SPY 10.71% 13.17% v
Vanguard High Dividend Yield Indx VYM 10.08% 10.94% v
Vanguard Dividend Appreciation VIG 9.73% 10.79% v
iShares Dow Jones Intl Select Div Idx IDV 9.51% 10.3% v
SPDR DJ Wilshire Intl Real Estate RWX 9.42% 9.83% v
PowerShares Intl Dividend Achievers PID 8.54% 8.66% v
iShares MSCI EAFE Index EFA 8.21% 9.65% v
First Trust Value Line Dividend Index FVD 7.75% 8.83% v
iShares Dow Jones Select Dividend Index DVY 7.37% 8.72% v
SPDR S&P Dividend SDY 7.22% 8.9% v
WisdomTree Emerging Market Equity Income DEM 6.27% 7.05% v
PowerShares HighYield Dividend Achievers PEY 6.16% 8.1% v
iShares MSCI Emerging Markets Index EEM 3.79% 4.99% v
iShares S&P U.S. Preferred Stock Index PFF 3.29% 4.06% v
Click to enlarge

The trend score is defined as the average of 1,4,13,26 and 52 week total returns (including dividend reinvested).

We would like to point out that more U.S. companies are expected to increase their dividend payout in 2011. In a recent report by CNBC, Senior analyst Howard Silverblatt stated "We estimate that over half the S&P 500 issues will pay out more in regular cash payments in 2011 than they paid in 2010." Given the current anemic economic recovery, positioning the U.S. equity portion of one's portfolio in dividend stock ETFs is a good strategy with certain defensive nature.

In fact, in the last year, investing in dividend ETFs has slightly outperformed a strategy that invests in broadbased equity indices. The following table shows the performance comparison between an income focused portfolio and a general market index focused portfolio, both using a tactical asset allocation strategy.

Portfolio Performance Comparison
Portfolio Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
Five Core Asset Index ETF Funds Tactical Asset Allocation Moderate 12% 100% 10% 85% 12% 87%
Retirement Income ETFs Tactical Asset Allocation Moderate 13% 102% 9% 76% 10% 69%
Click to enlarge

Barring a severe debt-induced financial event in global markets, we view investors should pay more attention to dividend ETFs in the coming years for defensive and growth purposes.

Symbols: RWX, SPY, IYR, VIG, IDV, VYM, EEM, PID, EFA, FVD, DVY, PEY, SDY, PFF

Disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

Disclosure: I am long IYR, SPY.