ETFs Capturing Mergent's Dividend Achiever Indexes

Recently a number of new ETFs have been issued that are related to Mergent’s “Dividend Achiever” indexes. A dividend achiever is a company that has increased its regular annual dividend for ten or more consecutive years.

Note that keeping the dividend unchanged one year out of ten is not acceptable and would cause the company to drop off of the “dividend achiever” list. Such a company would need to re-start the 10-year cycle all over again to get back onto the list. There is also a liquidity requirement- the two month average daily trading (price*volume) must exceed $500K.

Mergent is a spinoff of Moody’s that was acquired in 2004 by Xinhua Finance, a leading Chinese financial and media company. Mergent has compiled historical information on “dividend achievers” since 1979, and has built a growing business out of licensing several versions of the dividend achiever indexes to other companies that market mutual funds, closed end funds and ETF’s.

Here are 10 funds available that use variants of Mergent’s dividend achiever concept:

Blackrock Closed-End Funds

-Dividend Achievers (BDV)-Uses broad based list.
-Strategic Dividend Achievers (BDT)- Small and mid-caps.
-Enhanced Dividend Achievers (BDJ)- Like BDV but also uses option writing.

Powershares ETFs

-Dividend Achievers (PFM): Broad Based, modified market cap weighted
-High Growth Dividend Achievers (PHJ): Filtered version using the 100 stocks with the highest annual dividend growth rate for the last 10 years.
-High Yield Equity (PEY)- Filtered version using 50 highest yielding stocks excluding REITs and Limited Partnerships. Yield weighted (instead of market cap).
-International (PID)- Foreign domiciled corporations with US listings. The bar is set lower for these stocks- only five years of annual dividend increases are required.
There are options available on each of the four Powershare ETF’s.

Vanguard

-Dividend Appreciation Index Fund [VDAIX]
-Dividend Appreciation ETF (VIG)
These two funds are modeled off a filtered index called Dividend Achievers Select that requires a company to be incorporated in the US or its territories and trade on NYSE, NASDAQ or AMEX. There are also some additional liquidity requirements.

Claymore ETF

-CDN Dividend and Income Achiever [CDZ]: Based of Canadian dividend achievers. Trades in Canada on Toronto Exchange.

The dividend achiever concept rewards dividend consistency over higher dividends or higher dividend growth rates. Compare the following two companies:

Company A raised its annual dividend 5% a year for nine of the last 10 years, and kept it unchanged in the tenth year.
Company B raised its annual dividend 1% per year for each of the last 10 years.

Company A would flunk the “dividend achiever” test, while Company B would pass.

Imagine if baseball used the “dividend achiever” approach. Let’s say a visiting team scored nine runs- one run in each inning. The home team was shut out for the first 8 innings, but then scored 10 runs in the bottom of ninth. Using “dividend achiever” scoring, the home team would lose because it was not as consistent as the visiting team. (Of course, the home town fans would riot if this ever occurred in practice).

I have not invested in any of the dividend achiever funds yet, but I have the following three funds on my watch list:

1) BlackRock BDV: Its discount to NAV has narrowed recently, but I would consider buying it if the discount were to widen again.
2) PowerShares Hi Yield PEY: This fund has high back tested historical returns and it’s correlation with the S&P 500 is low which is good for diversification. It is also more liquid than the other domestic Powershares ETF’s with an average 3 month volume of 113K.
3) PowerShares Intl. PID: This fund also has good long term historical returns and is the most liquid of the Powershares ETF’s with 3 month average volume of 255K.