Dividend ETFs Under The Microscope

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Includes: DVY, VIG
by: David Van Knapp

Introduction

It has long been my intent to write an article with a title like, "Can Dividend ETFs Replicate What Dividend Growth Investors Do?" After all, funds have a certain one-stop-shopping appeal, and if I could reasonably achieve an effective dividend growth strategy and its results by purchasing an ETF or two, I would be strongly tempted to do it. More time for golf, poker, and other fun pursuits. I've been collecting material for such an article for months.

But it turns out there are so many dividend ETFs that just compiling a list of all of them is a daunting task. There are far too many to be covered in a single article.

So I have decided to take a different approach. Let's take a handful of dividend ETFs and just see what they do, what they hold, what their philosophies are, and what their performance has been. We'll defer for a later time the question of whether a dividend growth investor can reasonably pursue a dividend growth strategy by purchasing ETFs, although I will conclude this article with a few observations based on the ETFs discussed here.

In this article, we'll look at two of the most popular dividend ETFs plus SPY (NYSEARCA:SPY), the largest ETF tracking the S&P 500. I am including SPY because the S&P 500 is often used as a "plain vanilla" stock benchmark, and statistics regarding the dividend behaviors of S&P 500 companies are frequently used to create broad impressions of what "dividend stocks" are doing. So here's the lineup for this article:

  • SPDR S&P 500 tracking ETF: SPY
  • Vanguard Dividend Appreciation ETF (NYSEARCA:VIG)
  • iShares Dow Jones Select Dividend Index (NYSEARCA:DVY)

Note on Sources

Information about ETFs is available all over the Web. Specific information changes frequently and is often different from source to source. For example, Morningstar shows McDonald's as the largest holding in VIG, whereas Vanguard itself shows MCD as VIG's 9th-largest holding.

Therefore I used this order of sources in deriving the information shown here:

  • Preferred source = ETF's own website and sources linked to from there
  • Secondary source = Morningstar
  • Third source = Yahoo Financial

I used Morningstar for CAGR performance (1-year, 3-year, etc.), because the fund sites tend to show average rather than compound performance. Compound performance is the more common way of evaluating asset performance. Average performance usually exceeds compound performance based on the mathematics of how each is calculated. Presumably, fund sites use average performance because it looks better. I want CAGR consistency here. I also used Morningstar for 12-month yield in order to have consistency in that statistic.

The Morningstar Style Box designations are from Yahoo. Morningstar has a more complete picture of the spread of holdings throughout its 9-category Style Box, but I could not reproduce those pictures here. Yahoo selects the single predominant category of the nine.

SPY: SPDR S&P 500

Website: https://www.spdrs.com/product/fund.seam?ticker=SPY

Fund Family: State Street Global Advisors

Year Introduced: 1993

Net Assets: $106 B

12-Month Yield: 1.9%

Morningstar Style: Large Blend (category definitions)

Fund Summary:

The SPDR® S&P 500® ETF is a fund that, before expenses, generally corresponds to the price and yield performance of the S&P 500® Index. (That index, in turn, is composed of 500 selected stocks, all of which are listed on the NYSE Arca and span over 24 separate industry groups.) The Trust holds the stocks and cash, and the fund is not actively "managed" by traditional methods. Rather, the Trustee adjusts the portfolio from time to time to conform to periodic changes in the identity and/or relative weightings of securities in the S&P 500. Except for very small amounts of cash, the fund has been fully invested at all times.

Annual Expense Ratio: 0.09%

Total Stock Holdings: 500

Top 10 holdings (20.3% of total assets):

  • Apple (NASDAQ:AAPL)
  • Exxon Mobil (NYSE:XOM)
  • Microsoft (NASDAQ:MSFT)
  • IBM (NYSE:IBM)
  • Chevron (NYSE:CVX)
  • General Electric (NYSE:GE)
  • Procter & Gamble (PG
  • AT&T (NYSE:T)
  • Wells Fargo (NYSE:WFC)
  • Johnson & Johnson (NYSE:JNJ)

Total Performance:

  • 1-year: 6.5%
  • 3-year: 18.6%
  • 5-year: 0.7%
  • 10-year: 3.95%

Distribution Performance:

2008: 2.721

2009: 2.181 (-20%)

2010: 2.267 (+4%)

2011: 2.576 (+14%)

SPY distributes four times per year. All distributions have been dividends (no capital gains or return-of-capital distributions). Distribution amounts vary by quarter, so no conclusions can be drawn by extrapolating a run-rate from a single distribution.

Yield on Cost Performance after 4 Years: Calculated by taking 2011's total distribution and dividing by 2008's opening price: 2.576 / 146.21 = 1.8% for 2011. The approximate current run rate would be about 10% more than that, or 1.9%.

VIG: Vanguard Dividend Appreciation ETF

Website: https://personal.vanguard.com/us/funds/snapshot?FundId=0920&FundIntExt=INT#hist=tab%3A4

Fund Family: Vanguard

Year Introduced: 2006

Net Assets: $13.3 B

12-Month Yield: 2.0%

Morningstar Style: Large Blend (category definitions)

Fund Summary:

Seeks to track the performance of the Dividend Achievers Select Index. (The Dividend Achievers Select Index™ is an index created exclusively for Vanguard by Mergent. It is a subset of Mergent's Broad Dividend Achievers Index™ that follows U.S.-listed companies that have increased their annual regular dividends for at least 10 consecutive years. The Dividend Achievers Select Index uses proprietary methodology to focus on companies with consistent earnings growth and bolstered diversification across securities, sectors and investment styles.) Thus, VIG provides an ETF to track the performance of stocks of companies with a record of growing their dividends year over year for 10 years or more. VIG follows a passively managed, full-replication approach. That is, it attempts to replicate the target index by investing substantially all of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index. Except for very small amounts of cash, the fund has been fully invested at all times.

Annual Expense Ratio: 0.18%

Total Stock Holdings: 134

Top 10 holdings (38.6% of total assets):

  • IBM
  • Coca-Cola (NYSE:KO)
  • Procter & Gamble (NYSE:PG)
  • Wal-Mart (NYSE:WMT)
  • PepsiCo (NYSE:PEP)
  • Chevron
  • Exxon Mobil
  • United Technologies (NYSE:UTX)
  • McDonald's (NYSE:MCD)
  • 3M (NYSE:MMM)

Total performance:

  • 1-year: 6.5%
  • 3-year: 17.6%
  • 5-year: 2.99%
  • 10-year: NA

Distribution performance:

2008: 1.026

2009: 0.979 (-5%)

2010: 1.048 (+7%)

2011: 1.172 (+12%)

VIG distributes four times per year. All distributions have been dividends (no capital gains distributions). Distribution amounts vary by quarter, so no conclusions can be drawn by extrapolating a run-rate from a single distribution.

Yield on Cost Performance after 4 Years: Calculated by taking 2011's total distribution and dividing by 2008's opening price: 1.172 / 55.95 = 2.1% for 2011. The approximate current run rate would be about 10% more than that, or 2.3%.

DVY: iShares Dow Jones Select Dividend Index

Website: http://us.ishares.com/product_info/fund/overview/DVY.htm

Fund Family: iShares

Year Introduced: 2003

Net Assets: $10.1 B

12-Month Yield: 3.4%

Morningstar Style: Mid-Cap Value (category definitions)

Fund Summary:

Seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Dow Jones U.S. Select Dividend Index. (That index, in turn, is an annually constituted index of 100 stocks selected by dividend yield, record of having a non-negative historical 5-year dividend growth rate and earnings payout ratio <= 60%, and minimum average trading volume. Components are weighted by indicated annual dividend (not by market cap). Except for very small amounts of cash, the fund has been fully invested at all times.

Annual Expense Ratio: 0.40%

Total Stock Holdings: 100

Top 10 holdings (21.6% of total assets):

  • Lorillard (NYSE:LO)
  • Lockheed Martin (NYSE:LMT)
  • Chevron
  • CenturyLink (NYSE:CTL)
  • Entergy (NYSE:ETR)
  • Kimberly-Clark (NYSE:KMB)
  • Integrys Energy Group (NYSE:TEG)
  • PPG (NYSE:PPG)
  • McDonald's
  • Clorox (NYSE:CLX)

Total performance:

  • 1-year: 10.6%
  • 3-year: 23.8%
  • 5-year: (-1.58%)
  • 10-year: NA

Distribution performance:

2008: 2.419

2009: 1.661 (-31%)

2010: 1.703 (+3%)

2011: 1.848 (+9%)

DVY distributes four times per year. All distributions have been dividends (no capital gains distributions). Distribution amounts vary by quarter, so no conclusions can be drawn by extrapolating a run-rate from a single distribution.

Yield on Cost Performance after 4 Years: Calculated by taking 2011's total distribution and dividing by 2008's opening price: 1.848 / 64.49 = 2.9% for 2011. The approximate current run rate would be about 10% more than that, or 3.2%.

Comments and Observations

In compiling this data so far, I was struck by several things:

  • The relative lack of overlap in the top holdings of the two dividend ETFs. (See table below.) Perhaps that is to be expected, given the different weighting techniques between VIG and DVY, along with the yield-emphasis of DVY. Only Chevron and McDonald's are top-ten holdings of both.
  • The dividend ETFs' sorry performance in the areas of dividend growth rate and yield on cost. From my own experiences and from reading the articles and comments of other individual dividend growth investors, most of us did not experience dividend declines in 2009, and most of us have more robust dividend growth rates than the dividend ETFs profiled here.
  • Just looking at the two dividend ETFs here, it becomes apparent that not all dividend ETFs are created equal. The discrepancies in expected yield, dividend growth rate, and risk can vary significantly from product to product. VIG's components are generally well known "blue chip" firms, while DVY's yield bent has led it to smaller companies and lots of utilities.
  • The low annual expense ratios of these funds. Many of us as individuals would do well to emulate expenses this low.

Table of Commonly Held Stocks

Among the three funds examined thus far, these are the stocks held in common among the funds' top ten holdings.

Stock

SPY

VIG

DVY

3M

X

Apple

X

AT&T

X

CenturyLink

X

Chevron

X

X

X

Clorox

X

Coca-Cola

X

Entergy

X

Exxon Mobil

X

X

GE

X

IBM

X

X

Integrys

X

Johnson & Johnson

X

Kimberly-Clark

X

Lockheed Martin

X

Lorillard

X

McDonald's

X

X

Microsoft

X

PepsiCo

X

PPG

X

Procter & Gamble

X

X

United Technologies

X

Wal-Mart

X

Wells Fargo

X

Click to enlarge

I hope to follow up this article with similar articles comparing three dividend ETFs at a time. Suggestions are welcome.

Disclosure: I am long (T), (CVX), (JNJ), (KMB), (MCD), (PEP), (PG).