Dividend ETFs Aren't Created Equal: Dividend Appreciation vs. Dividend Hogs

| About: Vanguard Dividend (VIG)

Recently, we have seen divergent performance among U.S. dividend ETFs. Last week, ETFs (VIG, FVD) with emphasis on dividend achievers had a positive week while those (PEF, DVY) overweighting in cyclical sectors such as financials had a loss. In the following trend score table, U.S. ETFs are spread in the top and bottom parts. Noticeably, Powershares High Yeld Dividend Achievers (NASDAQ:PEY) descended close to the bottom. For a more detailed week by week performance, refer here.

Assets Class Symbols 01/19
SPDR DJ Wilshire Intl Real Estate (NYSEARCA:RWX) 10.19% 9.4% ^
SPDR S&P 500 (NYSEARCA:SPY) 9.3% 9.39% v
iShares Dow Jones US Real Estate (NYSEARCA:IYR) 9.1% 8.76% ^
Vanguard Dividend Appreciation (NYSEARCA:VIG) 8.24% 7.58% ^
iShares Dow Jones Intl Select Div Idx (NYSEARCA:IDV) 8.0% 4.9% ^
Vanguard High Dividend Yield Indx (NYSEARCA:VYM) 7.95% 7.89% ^
iShares MSCI Emerging Markets Index (NYSEARCA:EEM) 7.38% 8.2% v
PowerShares Intl Dividend Achievers (NASDAQ:PID) 7.33% 6.32% ^
iShares MSCI EAFE Index (NYSEARCA:EFA) 6.71% 4.87% ^
First Trust Value Line Dividend Index (NYSEARCA:FVD) 6.62% 6.15% ^
iShares Dow Jones Select Dividend Index (NYSEARCA:DVY) 6.36% 6.56% v
PowerShares HighYield Dividend Achievers (PEY) 6.26% 7.25% v
SPDR S&P Dividend (NYSEARCA:SDY) 5.82% 5.86% v
iShares S&P U.S. Preferred Stock Index (NYSEARCA:PFF) 3.09% 3.16% v

The above trend scores are the average of 1,4,13, 26 and 52 total returns.

One should understand that not all dividend ETFs are created equal. The two most popular dividend stock ETF strategies are dividend increasing (appreciation) and dividend hogs. Vanguard Dividend Appreciation (VIG) employs the former, while Vanguard High Dividend Yield Index (VYM) emphasizes high dividends. On Vanguard's website, it states:

The Fund seeks to track the performance of a benchmark index that measures the investment return of common stocks of companies that have a record of increasing dividends over time for VIG. For VYM, it tracks FTSE High Dividend Yield Index. The index's methodology holds the potential of durable high yields from solid companies, with lower weightings to companies that have high yields because of low or falling share prices.

The dividend appreciation approach puts more weight on high quality companies that have increased their dividends over time. The high dividends are not the primary focus. Companies that increase dividend payout over time in general should have better cash flow and higher confidence in their future earnings. They are also more shareholder friendly. Such an approach has been long adopted in investment communities. Some of the best investment newsletters such as Valueline and Investment Quality Trends have had model portfolios employing this approach for more than 30 years.

The high dividend (or so called 'dividend hog') approach, on the other hand, might run into dangers of investing in companies that merely try to maintain high dividends to appeal to investors.

The following table compares performance between the Vanguard Dividend Appreciation (VIG) and High Dividend Index (VYM), from 5/3/2006 to 1/14/2011. Blue is VYM.

VIG not only outperformed VYM in a big margin in annualized returns (3.14% vs. 0.66%), it also did so with much less risk (Sharpe ratio 8.3% vs. -1.7%) in the past 4 and half years. The same can be seen also for FVD, which has 5.76% annualized return in the same period.

In conclusion, in the dividend ETF investing world, it is important to pay attention to the underlying strategies employed. Investors should have a systematic way to pick the best dividend ETFs instead of merely focusing on yields.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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