WITH THE STOCK-VOLATILITY ROLLER COASTER picking up speed, wouldn't it be nice to have something to cushion the ups and downs?
Dozens of dividend-oriented exchange-traded funds, like the longstanding iShares Dow Jones Select Dividend Index (DVY) and State Street's SPDR S&P Dividend (SDY), offer an element that is hard to find these days—a healthy income stream. DVY has been yielding an unusually high 3.94% recently, while SDY has been offering 3.51%. Yields for other dividend ETFs have ranged between Vanguard Dividend Appreciation's (VIG) 2.15% and First Trust Morningstar Dividend Leaders' (FDL) 4.73%.
Not that dividend payers are immune to a share-price free-fall, but a 2%-to-4% income cushion can make for softer landings and higher long-term returns. According to Ned Davis Research, S&P 500 companies that consistently raised dividends provided an average annualized return of 9.3% from 1972 through May 2010, versus 7.1% for dividend payers that didn't consistently hike payouts and 1.4% for non-dividend-paying stocks. And Ed Clissold, a senior global analyst for the firm, says dividend payers also exhibit less share-price volatility during periods of market stress.
More than half of the S&P Dividend Aristocrats– companies that have increased dividends for 25 years running—have raised their payouts this year.
The only ETF specifically focused on this group is State Street's SDY. Its benchmark, the S&P High Yield Dividend Aristocrats Index, holds the 50 highest-yielding aristocrats of the S&P 1500. Currently in the high 40s, down from its 52-week high of $51.51, SDY is one of the largest, most liquid dividend ETFs, with assets of $2 billion and an average 429,000 shares traded daily.
SDY's prime competitor is the BlackRock iShares Dow Jones Select Dividend Index (DVY), which has $3.7 billion in assets and an average daily trading volume of 510,000 shares. It puts more emphasis on yields than SDY does. Broadly diversified across 10 market sectors, it's currently 28% weighted in utilities and 20% in consumer goods. SDY is similarly configured, but tilts toward consumer stocks more than utilities. Only about 10% of the holdings of either are financial companies. Before the 2008 meltdown, these outfits often accounted for half or more of many dividend ETFs. But since the crisis, many of these companies have slashed or eliminated their payouts.
Many fund managers agree with Binky Chadha, Deutsche Bank's chief strategist, that banks are due to resume or raise payouts. About 31% of PowerShares High Yield Equity Dividend Achievers (PEY) holdings are financials, as are about 11% of Vanguard High Dividend Yield (VYM). While both PEY and VIG aim to hold 50 companies with 10 straight years of dividend increases, VYM tracks a global benchmark more focused on yields.
