Do Dividend Achiever ETFs Achieve?

| About: Vanguard Dividend (VIG)

Summary

Two dividend achiever ETFs, VIG and PFM, are evaluated and compared.

Neither ETF can be counted on for regular distribution increases and returns since inception have been modest at best.

For investors looking for a dividend achiever ETF, VIG is preferable to PFM.

I am a dividend growth investor and as such I like to invest in individual stocks that have a history of growing dividends. On the other hand, I recognize that ETFs can help spread risk out by investing in a larger number of equities. What I would like is an ETF that has distributions that grow each quarter and each year, like some of the stocks I invest in. In this article, I will look at a couple of ETFs that are set up to track the NASDAQ US Dividend Achievers Select Index. A dividend achiever stock is one that has increased its dividend for each of the last ten years. So, by investing in a dividend achiever ETF, I should see growing distributions, right? The answer is yes and no!

The two Dividend Achiever ETFs I will cover are the Vanguard Dividend Appreciation ETF (NYSEARCA:VIG) and the PowerShares Dividend Achievers Portfolio ETF (NASDAQ:PFM).

VIG

This dividend achiever ETF, started April 21, 2006, follows the index but claims to exclude stocks that might have a low potential for increasing dividends and excludes REITs. Its expense ratio is a low 0.09%. As of the end of April 2016, it held 185 stocks. The top Ten are listed below and comprise 31.4% of net assets.

VIG

Rank

Holding

Symbol

1

Johnson & Johnson

JNJ

2

Coca-Cola

KO

3

Pepsi-Cola

PEP

4

Microsoft

MSFT

5

McDonalds

MCD

6 Medtronic MDT

7

CVS Health

CVS

8

3M

MMM

9

United Technologies

UTX

10

Walgreens Boots Alliance

WBA

Click to enlarge

Annual Total Returns since the first full year of the ETF are shown below through 2015 (Source: Prospectus).

Click to enlarge

The chart shows that VIG has had 2 down years out of its 9 full years of operation with a minimum annual return of -26.5% in 2008 and a maximum annual return of 29.0% in 2013. Starting with $10,000 at the beginning of 2007 would have resulted in $17,529 at the end of 2015. That beats the S&P 500 in the form of the SPY ETF, which over the same time period would have grown to $16,423. 2016 YTD VIG had a return of 6.7 (Source: Yahoo Finance). From inception to the end of Q1 in 2016, Vanguard reports a 7.23% return. Decent but less than impressive.

As this ETF is composed of companies that grow dividends each year, let's look also at the growth of distributions from the ETF (Source: VIG distributions).

Click to enlarge

The graph shows that even though distributions were significantly higher in 2015 than they were in 2007, the growth is very uneven and in two years, 2009 and 2013, distribution amounts actually decreased. In other words, though the ETF tracks dividend achievers, there is sufficient rollover in its holdings that investors cannot expect to see their income from the fund increase each year. For investors in retirement, that want a growing income stream, this ETF may not be appropriate. The regularity of distributions within a given year can also not be counted on. While most individual stocks within the ETF, such as the ones listed as top ten holdings, keep dividends either fixed or growing during the year, this ETF does not. Examples of the quarterly distributions for the past three years are shown to give a sense of the variability of quarterly distributions. For instance, in Q2 2015, the distribution dropped 3.7%. Not too bad, but still possibly unnerving for investors putting money in this ETF for income.

VIG quarterly distributions

Year

Q1

Q2

Q3

Q4

2015

0.459

0.442

0.443

0.475

2014

0.329

0.408

0.390

0.458

2013

0.288

0.345

0.357

0.398

Click to enlarge

PFM

This dividend achievers ETF started on September 15, 2005, a little more than 7 months before VIG. Unlike VIG, which excludes REITs and equities it feels might have a low potential for continuing to pay dividends, it is more of a dividend achievers pure play and consequently includes more equities, 274 compared to VIG's 185. PFM's expense ratio is also significantly higher, 0.55%, a significant detriment relative to owning VIG.

PFM's top ten holdings are shown in the Table below. Only 4 of these are in common with VIG's top holdings.

PFM

Rank

Holding

Symbol

1

Exxon Mobil

XO

2

Johnson & Johnson

JNJ

3

AT&T

T

4

Microsoft

MSFT

5

Wal-Mart Stores

WMT

6

Proctor & Gamble

PG

7

Verizon Comm

VZ

8

Coca - Cola

KO

9

Chevron

CVX

10

PepsiCo

PEP

Click to enlarge

Annual Total Returns since the first full year of the ETF are shown below through 2015 (Source: PFM Prospectus).

Click to enlarge

The chart shows that PFM has had 3 down years out of its 10 full years of operation with a minimum annual return of -29.5% in 2008 and a maximum annual return of 25.6% in 2013. To compare with VIG, using 2007 as the start year, an initial $10,000 investment would have resulted in $15,187 at the end of 2015, even lower than SPY. 2016 YTD PFM had a return of 9.4%. From inception to the end of Q1 in 2016, the PFM website reports a 6.65% annual return. Low for a dividend growth portfolio

The two charts below provide the corresponding distribution growth rates by year, in the graph, and by quarter in the table (Source: PFM distributions).

Click to enlarge

PFM has delivered choppy growth of its distribution income. Income fell in 2009, again in 2010 and again in 2013. For PFM the magnitude of the drops in income were higher relative to VIG and the income increases in the good years, were lower than for VIG. If shares were sufficient to generate $1,000 in income in 2007, then an income of $1,469 was received in 2015 for PFM shareholders. By comparison, VIG investors were rewarded with better income growth with $2,084 in 2015, if they started with $1,000 of income in 2015.

PFM quarterly distributions

Year

Q1

Q2

Q3

Q4

2015

0.06943

0.14159

0.12362

0.14661

2014

0.07134

0.11498

0.10010

0.13217

2013

0.06411

0.12028

0.08413

0.10513

Click to enlarge

Relative to the quarterly distribution numbers from VIG, PFM payouts were much more irregular and choppy. As an example, though the quarterly dividend at the end of 2014 was $0.13217 per share, the distribution three months later, at the end of Q1 2015 dropped to $0.06947. By comparison, VIG holders saw a slight increase in the distributed payout for these same relative quarters. This choppy pattern of payments is not likely to be appreciated by owners of PFM.

Conclusion

The two Dividend Achiever ETFs compared here, VIG and PFM, have not been big achievers, with average annual returns since inception of 7.23% and 6.65%, respectively. Further, neither ETF has a good record of increasing distributions each year, as you might expect from a good dividend aristocrat stock, or if you just held the top ten holdings of these ETFs. PFM's distributions are particularly choppy and may not be suitable for investors looking for a good steady, income stream.

PFM has a record of a significantly weaker return than VIG, no doubt, partially due to its significantly higher expense ratio. An investor who owns shares of PFM and likes ETFs based on a broad dividend achiever index should consider folding in the towel on this one and buying VIG instead.

Disclosure: I am/we are long T, VZ, JNJ.

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.