Capturing Big Dividend Growers With ETFs

Includes: DGRW, QDYN, VYM
by: Tom Lydon


Companies are paying more dividends.

Where we are seeing dividend hikes.

Dividend ETFs to capture greater dividend growth.

By Todd Shriber & Tom Lydon

The first quarter was another good one for dividends. Net dividend increases totaled $17.8 billion in the first quarter, up almost 23% year-over-year. Nearly 1,100 dividend increases were reported during the quarter, displacing the prior first quarter record of 1,069 set in 1979. Q1 2014 is 14.2% higher than the 944 increases in Q1 2013, according to S&P Dow Jones Indices.

Importantly, dividend increases outnumbered decreases more than 10-to-1. Said Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices:

Payments for the first quarter are estimated to have increased 15% over the first quarter of last year. Payout rates, which historically average 52%, continue to remain near their low at 36%.

Drilling down on some of the biggest contributors of that dividend growth is an important exercise, particularly for ETF investors because some of the most venerable names among dividend ETFs are light on the sectors that are offering investors impressive rates of dividend growth.

The top five dividend increases in the first quarter came courtesy of Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC), JPMorgan Chase (NYSE:JPM), PepsiCo (NYSE:PEP) and Cisco Systems (NASDAQ:CSCO). So three banks, a consumer staples firm and one technology company. Growth in tech and financial services dividend cannot be overlooked by ETF and income investors.

According to WisdomTree analyst Tripp Zimmerman:

[Technology] accounts for almost 37% of the increase in dividends from November 30, 2007, to March 26, 2014, with $36.5 billion of the $98.7 billion total increase in dividends. Technology firms are generally recent initiators, with lots of cash on their balance sheets and potential for further dividend growth. This sector accounted for about 20% of the increase from the November 30, 2009, low.

Of the four largest U.S. dividend ETFs, only the Vanguard High Dividend Yield ETF (NYSEARCA:VYM) has a noteworthy weight to the technology sector at 15.8% and over a third of that is occupied by Apple (NASDAQ:AAPL).

The WisdomTree U.S. Dividend Growth Fund (NASDAQ:DGRW) features an almost 21% weight to tech and a nearly 17% weight to consumer discretionary stocks. That sector has been the third-largest dividend grower in dollar terms since the 2009 market bottom, according to WisdomTree data. DGRW also pays a monthly dividend.

Consumer discretionary, industrials and technology are usually the best-performing sectors in rising rate environments. Those are three of DGRW's top four sector weights and the industrial sector ranks as the fourth-largest dividend grower since the 2009 bottom.

Finding large allocations to the financial services sector among many dividend ETFs is a hit or miss endeavor, the result of rampant dividend cutting during the financial crisis. However, the sector has shown renewed dividend commitment. Says Zimmerman:

Recent growth has been strong-with over $43 billion from the bottom in 2009 after the cuts through today. The latest increase came after the Fed's approval of their stress test results. On the other hand, financials are still over $22 billion short of their November 30, 2007, high-the only sector that is still below its pre-financial crisis highs.

The FlexShares Quality Dividend Dynamic Index Fund (NYSEARCA:QDYN) is an idea to consider for the investor looking to capitalize on financial services and tech dividend growth as those sectors combine for 36% of the ETF's weight.

QDYN, unlike many of its dividend ETF rivals, is also light on the consumer staples sector. According to FlexShares, QDYN's holdings are:

selected based on expected dividend payment and fundamental factors such as profitability, solid management, and reliable cash flow.

The $61.1 million ETF has a weighted average dividend yield of 3.27% and six of its top 17 holdings are either tech or bank stocks. QDYN is up nearly 33% since debuting in December 2012.

WisdomTree U.S. Dividend Growth Fund Sector Weights

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.