This is the second in a series of articles that looks under the hoods of ETFs with "dividend" in their names. This article covers three ETFs whose names (or the names of their underlying indexes) imply "high yield." The ultimate goal is to discover if there is a dividend ETF that closely replicates the strategies, processes, and/or results of the many dividend growth investors who frequently write and comment here at Seeking Alpha.
The first article in the series can be found here: "Dividend ETFs Under the Microscope." That article examined two of the largest dividend ETFs in existence: VIG - Vanguard Dividend Appreciation ETF, and DVY - iShares Dow Jones Select Dividend Index.
The "Top Ten Holdings" table at the end of this article has been expanded to cover not only those two ETFs from the first article but also the three new ones examined here:
- HDV - iShares High Dividend Equity Fund
- SDY - SPDR S&P Dividend ETF
- VYM - Vanguard High Dividend Yield ETF
I also added each ETFs 12-month yield at the top of each column for easy comparison and dropped SPY (the S&P 500 tracking ETF) from the table, because it is not really a dividend-focused fund.
As in the first article, my hierarchy for source information is:
- Preferred source = The ETF's own website and sources linked from there
- Secondary source = Morningstar (primary source for yield and return information)
- Third source = Yahoo Financial
HDV: iShares High Dividend Equity Fund
Website: Click here to go to the HDV website.
Fund Family: iShares
Year Introduced: 2011
Net Assets: $1.3 B
12-Month Yield: 2.5%
Morningstar Style: Large Value (category definitions)
The iShares High Dividend Equity Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Morningstar Dividend Yield Focus Index. The fund invests at least 90% of assets in the securities of the underlying index or in depositary receipts representing securities of the index. However, it may invest up to 20% of assets in certain futures, options and swap contracts, cash and cash equivalents, including money market funds advised by the adviser or its affiliates, not included in the underlying index, but which the adviser believes will help the fund track the index. The fund is somewhat concentrated, as shown by:
- Concentration in number of stocks: 62% of its assets are in its top-10 holdings.
- Concentration in industries: 29% of its holdings are in healthcare and another 23% are in consumer goods.
The underlying Morningstar index, according to Morningstar's own ETF analyst, is somewhat unusual:
Unusually, the strategy uses data based on Morningstar analyst discretion to select its stocks….The fund's screens rest on three legs, two qualitative and one quantitative.
The main qualitative screen rests on the economic moat,…a structural advantage that allows a firm to reap excess returns on its invested capital. Moats prevent new entrants from overrunning unusually profitable opportunities. Since they realize their advantages over long horizons, markets have tended to underprice them. Morningstar equity analysts rate firms as having wide, narrow, or no moats; no-moat firms get the boot.
The other element of discretion comes from the uncertainty rating. [Morningstar] analysts assign the rating--ranging from low to extreme--based on a firm's structural factors and their perception of the knowability of a firm's "fair value." HDV excludes firms with uncertainty ratings above medium, weeding out speculative and volatile firms.
The quantitative leg of the fund's screens rests on the Morningstar Distance to Default score, a measure of a firm's ability to make good on its liabilities. The score penalizes firms with thin balance sheets and volatile liabilities (such as its stock price), further winnowing the field. The rules leave a handful of dividend-payers with strong balance sheets--ho-hum stocks, really. HDV is fundamentally a bet that tortoises beat hares. The evidence is supportive: low-volatility stocks have had better risk-adjusted returns than high-volatility stocks in most markets studied….Given HDV's reliance on data fueled by analyst discretion, it could be described as quasi-actively managed. The strategy may benefit from using information not available through other means. On the other hand, data on the strategy is scarce--its backtested returns start only in mid-2005--so it's hard to say whether the fund's expected performance will reflect more than its low-volatility and quality tilts. The fund could serve as a core holding. However, at times the fund can behave idiosyncratically owing to its huge sector and stock bets, so benchmark-sensitive investors should treat it as a satellite holding.
In connection with the "low volatility" reference, the fund's website shows its beta as just 0.37 compared to the S&P 500 (the time period is not specified).
Annual Expense Ratio: 0.40%
Total Stock Holdings: 75
Top 10 holdings (62.1% of total assets):
- AT&T (T)
- Pfizer (PFE)
- Johnson & Johnson (JNJ)
- Procter & Gamble (PG)
- Verizon (VZ)
- Philip Morris (PM)
- Merck (MRK)
- Intel (INTC)
- Altria (MO)
- Abbott (ABT)
- 1-year: 13.6%
- 3-year: NA
- 5-year: NA
- 10-year: NA
HDV 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. HDV's 2011 distributions may not be indicative of its realistic projected yield, as the first distribution was made in June, then two distributions were made in December to bring the total to four for 2011. It is impossible to tell whether the 2011 total is representative of what the total would have been had the fund been in existence for the full year 2011.
Yield on Cost Performance after 4 Years: NA. The fund has been in existence only since 3/29/2011.
SDY: SPDR S&P Dividend ETF
Website: Click here to go to the SDY website.
Fund Family: State Street Global Advisors
Year Introduced: 2005
Net Assets: $9.1 B
12-Month Yield: 2.0%
Morningstar Style: Large Blend (category definitions)
Seeks to closely match, before expenses, the returns and characteristics of the S&P High Yield Dividend AristocratsTM Index. That index, in turn, is designed to measure the performance of the 60 highest dividend yielding S&P Composite 1500 Index constituents that have followed a managed-dividends policy of consistently increasing dividends every year for at least 25 consecutive years. The fund website shows the beta of the fund as 0.92 (no specification as to when this was measured).
Annual Expense Ratio: 0.35%
Total Stock Holdings: 60
Top 10 holdings (27.7% of total assets):
- Pitney Bowes (PBI)
- HCP (HCP)
- Leggett & Platt (LEG)
- Old Republic (ORI)
- Cincinnati Financial (CINF)
- Kimberly Clark (KMB)
- Consolidated Edison (ED)
- Clorox (CLX)
- 1-year: 6.1%
- 3-year: 17.7%
- 5-year: 1.6%
- 10-year: NA
2009: 1.733 (-21%)
2010: 1.638 (-5%)
2011: 1.738 (+6%)
SDY 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: 1.738 / 55.06 = 3.2% for 2011. The approximate current run rate would be about 10% more than that, or 3.5%.
VYM: Vanguard High Dividend Yield ETF
Website: Click here to go to the VYM website.
Fund Family: Vanguard
Year Introduced: 2006
Net Assets: $4.5 B
12-Month Yield: 2.8%
Morningstar Style: Large Value (category definitions). Vanguard had a "spread" diagram that I am able to reproduce here:
VYM seeks to track the performance of the FTSE® High Dividend Yield Index, which measures the investment return of common stocks of companies characterized by high dividend yields. Thus, VYM provides a convenient way to track the performance of stocks with histories of above-average dividend yields. The fund follows a passively managed, full-replication approach. Thus it attempts to replicate the target index by investing all, or 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. The underlying index, in turn, is derived from the U.S. component of the FTSE Global Equity Index Series (GEIS). It tracks common stocks of U.S. companies that have paid above-average dividends for the previous 12 months, excluding REITs. The index is administered by FTSE International Limited.
Annual Expense Ratio: 0.13%
Total Stock Holdings: 439
Top 10 holdings (34.2% of total assets):
- Exxon Mobil (XOM)
- Microsoft (MSFT)
- Chevron (CVX)
- General Electric (GE)
- Procter & Gamble
- Johnson & Johnson
- JPMorgan Chase (JPM)
- Coca-Cola (KO)
- 1-year: 9.3%
- 3-year: 20.3%
- 5-year: 0.96%
- 10-year: NA
2009: 1.168 (-19%)
2010: 1.091 (-7%)
2011: 1.327 (+22%)
VYM 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: 1.327 / 51.10 = 2.6% for 2011. The approximate current run rate would be about 10% more than that, or 2.9%.
Comments and Observations
After examining 5 dividend ETFs in two articles, a few individual stocks are starting to emerge as common top-ten holdings: AT&T, Chevron, and Procter & Gamble are in three of the top tens, and several other stocks are held by at least two of the dividend ETFs examined thus far.
The 12-month dividend yields are surprisingly low, whether the ETF claims to be "high yield" or not. All the yields are between 2.0% and 3.4%. In fact, the highest yield comes not from a "high yielder," but from VIG. All of the ETFs examined so far had dividend distribution drops in 2009, except for HDV, which wasn't around then. I was not able to locate the underlying index, so I could not use the backtest to see what distributions would have been in the 2008-2010 period.
HDV seems like the closest in spirit and process to what dividend growth investors typically do. It is more actively managed than the others. Unfortunately, it has no real track record yet. But it may be worth further investigation. In researching this article, I was not able to locate a copy of the Morningstar index upon which it is based, which was backtested for several years. That would be good information to have.
Table of Commonly Held Stocks
Among the 5 funds examined thus far, these are the stocks held in each fund's top ten holdings.
Johnson & Johnson
Leggett & Platt
Procter & Gamble