Mutual funds and exchange-traded funds (ETFs) focused on dividend stocks can be good places to look for attractive high-yield or high dividend growth plays. Investors should screen mutual fund and ETF top holdings regularly to see what stocks portfolio managers consider to be good dividend investments.
We took a glimpse at the top holdings of two popular ETFs focused on dividends, the Vanguard High Dividend Yield ETF (NYSEARCA:VYM) and WisdomTree LargeCap Dividend Fund (NYSEARCA:DLN), and found that they have five of the top six positions in common. The Vanguard High Dividend Yield ETF, consisting of 436 stocks, has a distribution yield of 2.9% and a low expense ratio of 0.13%. It has returned 14.5% per year over the past five years. On the other hand, WisdomTree LargeCap Dividend Fund, with xx constituents, has a distribution yield of 2.7% and an expense ratio of 0.28%. This ETF has returned 15% per year over the past three years.
Here is a closer look at five of the top six holding that these ETFs have in common. All featured equities are large capitalization stocks, with dividend yields in excess of the 10-year Treasury bond and the S&P 500 dividend yields.
AT&T (NYSE:T) is a $204-billion U.S. telecommunications giant. The company pays the highest dividend yield among the Dow 30 index constituents. It has paid uninterrupted dividends since 1893. AT&T's current dividend is yielding 4.9% on a payout ratio of 72% of last year's free cash flow. Competitor Verizon Communications (NYSE:VZ) is yielding 4.6%, while Sprint Nextel (NYSE:S) does not pay any dividends. While the company's EPS contracted at an average annual rate of nearly 19% per year over the past five years, its dividends increased at an average annual rate of 5.3% over the same period. Analysts forecast better days ahead, expecting the company's EPS to grow on average by 9.2% per year for the next five years. The company is riding the smartphone boom, as it plans to sell a record 25 million devices this year alone. With dividends and share buybacks, AT&T has returned almost $10 billion to shareholders in the first half of 2012. In late July, its Board of Directors approved a purchase of 300 million shares, or 5% of the outstanding stock, valued at the time at $11 billion. The stock has a free cash flow yield of 2.8%. It has low ROE of 4.1% and return on invested capital [ROIC] of 2.8%. Its forward P/E is slightly below that of the telecommunications sector, and, in particular, well below Verizon's forward P/E. Fund managers Phill Gross (Adage Capital), Donald Chiboucis of Columbus Circle Investors and Cliff Asness (AQR Capital Management) hold large stakes in the stock.
Exxon Mobile Corporation (NYSE:XOM) is one of dividend aristocrats that has raised dividends each year for the past 30 years. The company is now the largest dividend payer in the world. Currently, this $425-billion integrated oil and natural gas giant is paying a dividend yield of 2.5% on a low payout ratio of 24%. Peers Chevron Corporation (NYSE:CVX) and ConocoPhilips (NYSE:COP) are paying higher dividend yields of 3.2% and 4.7%, respectively. Over the past five years, Exxon Mobil's EPS and dividends grew at average annual rates of 5.0% and 7.6%, respectively. The company boosted its dividend by a larger 21% in April of this year, suggesting that above-average hikes are likely in the cards in the future. Analysts forecast that the company's EPS will increase at an average rate of 7.5% per year for the next five years. In addition to dividends, Exxon Mobile has been returning money to shareholders through substantial share buybacks: in 2011 alone, the company repurchased as much as $21 billion in its own stock. The company is expected to continue to generate substantial free cash flow, especially as the demand for oil and natural gas increases with the rebounding global economies and future population growth. The stock has a free cash flow yield of 3.2%, a high ROE of 28%, and ROIC of 23%. As regards its valuation, the stock has a forward P/E above its respective industry. The stock's price-to-book is also well above the industry average. Among fund managers, Phill Gross, Cliff Asness, and D. E. Shaw are bullish about the stock.
Microsoft (NASDAQ:MSFT) is the largest tech company after Apple Inc. (NASDAQ:AAPL) in terms of market capitalization. The $247-billion company provides software and services, online information and content, and gaming and entertainment devices and services. Its dividend is yielding 3.2% on a payout ratio of 46%. Competitors such as Apple Inc. and Oracle (NYSE:ORCL) are paying dividend yields of 1.7% and 0.8%, respectively. Rival Google (NASDAQ:GOOG) does not pay regular dividends. Over the past five years, the company's EPS and dividends grew at average annual rates of 8.9% and 14.9%, respectively. Analysts forecast that Microsoft's EPS will expand at an average rate of 9.7% per year for the next half decade. The company is releasing Windows 8 and, as of recently, is selling a new tablet, Surface. These are expected to boost sales in the coming year, although the competition in the tablet and smartphone markets is fierce. Microsoft's stock has a high free cash flow yield of 9.2%, ROE of 27.5%, and ROIC of 22%. In terms of valuation, the stock is trading on a forward P/E well below its respective industry. For the reference, its forward P/E of 9.6x compares to Apple Inc.'s of 12.7x, Oracle's of 11.3x, and Google's of 16.6x. The stock is popular with value investors Jean-Marie Eveillard and Ken Fisher.
General Electric Co. (NYSE:GE) is an industrial conglomerate giant producing a wide range of products from wind turbines and jet engines to medical imaging technologies and financial services. The company's dividend is yielding 3.0% on a payout ratio of 59%. Its competitors Siemens AG (SI), 3M Company (NYSE:MMM), and Honeywell International (NYSE:HON) pay dividend yields of 2.9%, 2.5%, and 2.5%, respectively. GE's dividend collapsed in 2009 and 2010, but since it has been growing. The company's EPS shrank at an average rate of 8% per year over the past five years. Analysts forecast that its EPS will grow at an average rate of 12% per year for the next five years. The company has announced that it expects to deliver stronger-than-expected organic industrial growth when it reports third-quarter earnings. The expected rebound in the global economy as of next year will improve the market outlook for GE. Long-term, the expected robust growth in emerging markets and the accelerated industrialization and urbanization in the developing world, as well as the global push for green energy, will bode well for GE's market prospects and business performance. GE's stock has a free cash flow yield of 5.1%, ROE of 10.6%, and ROIC of 3.8%. Based on a forward P/E, the stock is trading on par with the diversified industrials industry. Billionaire Ken Fisher is a big fan of the stock.
Chevron Corporation is a mega-cap integrated oil and natural gas company. Its dividend yield is 3.2%, while its dividend growth over the past five years averaged 9.2% per year. This year, Chevron hiked its dividend by a higher-than-average rate of 11%. The company has a payout ratio of only 27%. Chevron's peer Exxon Mobile yields less, while ConocoPhillips and Total SA (NYSE:TOT) yield more. Over the past five years, the company's EPS grew at an average annual rate of 11.5% per year. Analysts forecast lower EPS growth for the next five years, averaging merely 1.4% per year. The company recently announced its third-quarter results would show earnings falling sequentially due to lower output and prices. Given that, among energy majors, Chevron is the most leveraged play to oil prices, the company's performance may suffer if energy prices decline amid a speculated global recession. Based on a forward P/E of 9.3x, Chevron is priced almost on par with the integrated oil and natural gas industry. Its rival Exxon Mobil's forward P/E is 11.4x, while ConocoPhillips' ratio is 10.5x. However, Exxon Mobile is expected to see faster EPS growth over the next five years, but its dividend yield is lower than Chevron's. ConocoPhillips' EPS is expected to shrink over the next half decade. Chevron has a free cash flow yield of 3.2%, ROE of 28%, and ROIC of 19%. Fund managers Phill Gross, Cliff Asness, and Jim Simons are all bullish about Chevron.
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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.