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Dividend stocks are in favor right now, mostly due to current low interest rate and low growth economies. One way to invest in dividend stocks is through dividend stock ETFs. Investors can further use these ETFs as proxies for equity exposure in their portfolios. For example, MyPlanIQ's Retirement Income ETFs uses only dividend stock ETFs for U.S. equity and international equity exposures to construct asset allocation portfolios.

The following table shows how dividend paying stock ETFs have been doing recently:

Dividend Stock ETF Trend, Jan. 18, 2012. Performance data are based on closing prices last Wednesday, Jan. 11.

Description Symbol 1 Week 4 Weeks 13 Weeks 26 Weeks 52 Weeks Trend Score
Vanguard High Dividend Yield Indx VYM 0.74% 3.38% 9.12% 4.18% 11.77% 5.84%
iShares Dow Jones Select Dividend Index DVY 0.67% 2.05% 8.22% 4.66% 12.81% 5.68%
PowerShares HighYield Dividend Achievers PEY 0.42% 1.41% 8.41% 7.87% 9.69% 5.56%
SPDR S&P Dividend SDY 1.22% 2.94% 7.67% 3.6% 8.86% 4.86%
First Trust Value Line Dividend Index FVD 1.05% 2.91% 7.68% 3.05% 9.59% 4.86%
Vanguard Dividend Appreciation VIG 1.3% 3.53% 8.57% 0.72% 7.51% 4.33%
iShares Dow Jones US Real Estate IYR 0.95% 4.08% 12.35% -4.11% 7.84% 4.22%
SPDR S&P 500 SPY 1.22% 5.32% 8.64% -1.27% 3.06% 3.39%
iShares S&P U.S. Preferred Stock Index PFF 0.67% 5.11% 4.27% -1.64% 2.17% 2.12%
WisdomTree Emerging Market Equity Income DEM 2.98% 6.58% 6.54% -7.34% -5.1% 0.73%
PowerShares Intl Dividend Achievers PID 1.56% 4.18% 2.13% -4.85% -1.02% 0.4%
iShares MSCI Emerging Markets Index EEM 3.95% 8.48% 7.55% -11.72% -11.88% -0.73%
iShares Dow Jones Intl Select Div Idx IDV 2.45% 4.37% 0.61% -9.28% -6.35% -1.64%
iShares MSCI EAFE Index EFA 2.2% 4.72% 1.78% -12.31% -11.43% -3.01%
SPDR DJ Wilshire Intl Real Estate RWX 2.83% 6.19% -0.39% -13.78% -10.93% -3.22%

The above trend scores are the average of 1,4,13, 26 and 52 total returns.

It is clear that dividend stock investing approach has outperformed a broad-based stock index by a big margin. For example, Vanguard High Dividend Yield Index ETF VYM had 11.77% total return in the last 52 weeks, compared with 3.06% of SPY in the same period.

The two most popular dividend stock ETF strategies are dividend increasing (appreciation) and dividend hogs. Vanguard Dividend Appreciation (NYSEARCA:VIG) employs the former, while Vanguard High Dividend Yield Index (NYSEARCA:VYM) emphasizes high dividends. On Vanguard's website, it states:

The Fund seeks to track the performance of a benchmark index that measures the investment return of common stocks of companies that have a record of increasing dividends over time for VIG. For VYM, it tracks FTSE High Dividend Yield Index. The index's methodology holds the potential of durable high yields from solid companies, with lower weightings to companies that have high yields because of low or falling share prices.

The dividend appreciation approach puts more weight on high quality companies that have increased their dividends over time. The high dividends are not the primary focus. Companies that increase dividend payout over time in general should have better cash flow and higher confidence in their future earnings. They are also more shareholder-friendly. Such an approach has been long adopted in investment communities. Some of the best investment newsletters such as Valueline and Investment Quality Trends have had model portfolios employing this approach for more than 30 years.

The dividend hog approach is more like a value investing style among dividend stocks, while the dividend appreciation approach is more like growth at a reasonable price ("growth" here is measured by dividend appreciation, while "at a reasonable price" is automatically reflected by reasonable yields -- if a stock gets expensive, its yield will be lower).

From the above table, one can see that at the moment, dividend hog ETFs such as VYM, DVY, SDY have been doing better than dividend appreciation ETFs such as VIG, FVD. This is an indication of "risk on" mood among dividend investors.

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.

Source: Dividend Stock ETF Review