Capturing Incremental Income With Dividend ETFs

Jun. 6.12 | About: iShares Core (HDV)

I've been researching options to gain exposure to dividend stocks. ETFs focused on just dividend stocks provide one stop shopping for dividend stocks - strong dividend companies, reasonable expense ratios, and reduced transaction costs. This article will take a more detailed look at the iShares High Dividend Equity ETF (NYSEARCA:HDV) and compare it to the SPDR S&P 500 Trust ETF (NYSEARCA:SPY).

If someone is looking to invest in the market, might an ETF focused on dividends be a better option than the broader market ETFs? I also included SPDR S&P International Dividend (NYSEARCA:DWX) and PowerShares High Yield Equity Dividend Achievers (NYSEARCA:PEY). The first chart shows some basic comparisons of these four ETFs.

Select ETF Attributes
Recent Closing Price $128.10 $56.43 $41.91 $8.99
Assets ($ B) 103.1 1.4 0.9 0.3
Dividend Yield 1.9% 2.5% 7.2% 3.8%
Average 3 Month Volume (000) 160,739 192 209 228
Click to enlarge
Source: Yahoo!Finance. Yields calculated based on trailing 12 months of dividends from author calculations.

As expected, HDV has a higher dividend yield than SPY; however, it is not substantially higher. HDV's yield is also much lower than either DWX and PEY. It is also not surprising to see that all three dividend ETFs have much lower liquidity as well as fewer assets than SPY. While this might be cause for some concern, their figures are not extreme.

The next high level question is how does HDV compare to SPY on portfolio dimensions. The first interesting note is that HDV boasts a much lower volatility than SPY. HDV volatility is just 60% of the volatility of SPY. This should help you sleep better at night. HDV is has an 84% correlation to SPY, meaning that it pretty closely tracks SPY in terms of up days and down days.

The next question is to quickly ask how HDV has performed relative to SPY. While historical performance is no indication of future performance, it is interesting to compare. The following table shows the performance for all four ETFs.

Recent Total Return
3 Months 1.0% -6.3% -17.3% -2.3%
6 Months 3.0% 0.8% -11.1% -1.3%
1 Year 11.2% 0.3% -27.2% 7.5%
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Source: Yahoo!Finance, Author Calculations

HDV has outperformed the other ETFs over the past year. DWX with an international focus has underperformed the others by a wide margin.

Blue Chip Dividend Stocks

HDV is composed primarily of blue chip dividend stocks that are favored by many dividend investors. HDV is also pretty concentrated with the top ten holdings representing 62% of the assets. Furthermore, AT&T Inc. (NYSE:T) represents almost 10% of the ETF by itself. The following table shows the top ten holdings:

HDV Top Ten Holdings
Name Ticker Percentage of Assets (%)
AT&T Inc. T 9.9
Pfizer, Inc. PFE 8.0
Johnson & Johnson JNJ 7.1
Procter & Gamble Company PG 6.5
Philip Morris International Inc PM 6.3
Verizon Communications Inc. VZ 6.1
Merck & Company, Inc. MRK 5.9
Intel Corporation INTC 5.0
Altria Group, Inc. MO 3.9
ConocoPhillips Common Stock COP 3.6
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Source: Yahoo!Finance

In contrast, PEY has a more eclectic mix of stocks due to its mid-cap focus (not sure how T and MO get in there though) and also less concentration with the top ten holdings representing just 29% of assets. The top ten are listed below:

PEY Top Ten Holdings
Name Ticker Percentage of Assets (%)
Vector Group Ltd. VGR 4.3
Pitney Bowes Inc. PBI 4.1
Old Republic International Corp ORI 3.0
AT&T Inc. T 2.8
Mercury General Corporation MCY 2.6
Altria Group, Inc. MO 2.5
PP&L Corporation PPL 2.4
Vectren Corporation VVC 2.3
People's United Financial, Inc. PBCT 2.3
UNS Energy Corporation UNS 2.2
Click to enlarge
Source: Yahoo!Finance

PEY is composed of some common dividend stocks such as MO and T, but also has several names that I don't immediately recognize. There are others, such has PBI, that I do recognize and would not seek to own.


HDV looks like a reasonable way to gain exposure to a wide range of dividend stocks. One consideration is that its dividend yield of just 2.5% is smaller than expected. However, it should be noted that this is based on the trailing twelve months of dividends which have been some what variable and only have four quarterly dividend payments.

Furthermore, the most recent quarterly dividend was $0.526, which on an annualized basis would provide a more attractive 3.7% yield. Purchasing HDV would also reduce transaction costs when compared to purchasing a basket of dividend stocks. This is quite possibly the largest benefit of this approach. DWX with its international set of stocks and high yield may also be an attractive opportunity to investigate.

A second approach to capturing value from dividend ETFs is to consider their holdings as potential dividend investment ideas. As I noted earlier, I'm not familiar with all the top ten holdings of PEY; however, this might be an opportunity to learn about some more dividend stocks.

Disclosure: I am long SPY.

Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.