According to a Seeking Alpha Market Current note on Monday, 11/5/12, the theme of Dividend Investing has engendered approximately 2 new funds (mutual funds or ETFs) on average per month since 2008, with a commensurate doubling of Assets Under Management.
Barron's recently screened these new funds, and discovered that many of them are not living up to their promise. Of 53 funds that have over $100 million in AUM and have existed for more than three years, only 24 are beating the current yield of the S&P 500 (2.1%) and only 6 have yields above 3%.
To that I say, what is the point of paying a money manager for such a weak yield? Personally, with the analysis I have been doing and the criteria I have been using, I think I can do better than that. I am working on a new model portfolio that I will present soon.
The goals with my dividend model portfolio will be an annual yield of better than 3%, and annual share-price growth of 10-15%.
To make it to consideration for my dividend model portfolio, I want to see a yield of over 3.0%, a history of paying and raising dividends for at least 10 years, a 5-year Dividend Growth Rate (DGR) of 7.0% or better, and a 12-month total return of 15% (the current 12-month return of the S&P 500.)
While I am developing this model portfolio, I am taking a look at some of the more well-known dividend-specific ETFs, in order to determine what I think of their portfolios, and whether or not their top holdings will fit into my portfolio.
The first ETF to endure my scrutiny is the iShares Dow Jones Select Dividend Index (NYSEARCA:DVY), one of the oldest of the dividend-focused ETFs. This fund has been in existence since November 2003, has a current yield of 3.5% and a 12-month total return of 13.8%. The fund has $11.1 billion in assets. It seeks to replicate, in price and yield, the Dow Jones Dividend Index, which in turn is an index of 100 of the highest-yielding stocks in the Dow Jones index.
As of November 5, the DVY 10 top holdings are Lorillard (NYSE:LO), Lockheed Martin (NYSE:LMT), Chevron (NYSE:CVX), Kimberly-Clark (NYSE:KMB), CenturyLink (NYSE:CTL), Entergy Corp. (NYSE:ETR), PPG Industries (NYSE:PPG), Integrys Energy Group (NYSE:TEG), DTE Energy (NYSE:DTE), and NextEra Energy (NYSE:NEE).
I first sorted the companies by their dividend-paying history, based on the incredibly comprehensive worksheets developed by David Fish. Of these ten holdings, I eliminated five for their short history of raising and paying dividends (Lorillard - only 5 years, CenturyLink - 0 years, Entergy - 2 years, Integrys Energy - 0 years, and DTE Energy - 2 years).
Next I sorted for 12-month total return, using information obtained from ycharts.com. I eliminated one (Chevron) for its low 12-month total return (6.0%).
And I eliminated one (PPG Industries) for its low yield (2.0%).
That left only three of the top ten companies in the DVY fund that I would consider holding in my own portfolio.
Lockheed Martin is currently trading at approximately $94 and yields 4.9%. It has a 10-year history of paying and raising dividends, a 5-year average DGR (Dividend Growth Rate) of 21.1%, and a 12-month total return of 25.5%. The company sports a reasonable PE of 10.7 and is trading at its 52-week high.
Kimberly-Clark is currently trading at approximately $83 per share and yields 3.6%. It has a 40-year history of paying and raising dividends, a 5-year average DGR (Dividend Growth Rate) of 7.8%, and a 12-month total return of 23.9%. The company sports a PE of 17.6 and is trading at 5% off its 52-week high.
NextEra Energy is currently trading at approximately $70 per share and yields 3.4%. It has an 18-year history of paying and raising dividends, a 5-year average DGR (Dividend Growth Rate) of 8.0%, and a 12-month total return of 28.2%. The company sports a PE of 13.5 and is trading at 4% less than its 52-week high.
I feel that, of the top ten holdings in the DVY fund, these three companies are very well positioned to provide stability, a future income stream and the opportunity for price appreciation. I will definitely be considering them for the Dividend Model Portfolio that I am constructing.