by Tom Taulli | July 23, 2013 12:07 pm
When it comes to looking at a stock, a dividend is more than just about getting a nice yield.
Payouts should be consistent. A lowered dividend is usually a sign that the company is faltering, and if a dividend disappears … well that’s even worse.
One way to get a sense of the stability of a dividend is, of course, to consider the track record. If a company has paid a dividend for the past ten years, it’s a pretty good sign. Even better if it has increased every year!
But if you don’t have the time for stock picking, there are a few exchange-traded funds for you to consider. Here’s a look:
The Vanguard Dividend Appreciation ETF (VIG) is composed of an index, called the NASDAQ US Dividend Achievers Select, which has companies that have increased dividends for the past ten consecutive years. But there’s a wrinkle. Vanguard works with research firm Mergent to apply filters on the index. It essentially weeds out companies that are likely to cut dividends.
So how does this system work? Well, Vanguard has kept its approach a secret (proof of how brutally competitive the ETF world can be). But one thing is clear: the portfolio has a big focus on large caps.
VIG holds about 146 stocks, with an average market cap of $53.8 billion and a return on equity of 22.87% (only .4% are foreign companies). Top holdings include PepsiCo (PEP), Coca-Cola (KO), Abbott Laboratories (ABT) and Walmart (WMT).
Because of this focus on top-notch firms, VIG doesn’t necessarily have the highest yield, which currently pays out 2.2%. Yet the fund has a strong track record when looking at the total return in the long term. For the past three years, the average gain was a juicy 17.96%. And the expense ratio is a mere 0.10%.
If you are looking for more exposure to mid-and-small caps, you should take a look at the iShares Dow Jones Select Dividend Index (DVY). The portfolio is based on the Dow Jones U.S. Select Dividend Index, which takes the top 100 yielding stocks based on the following criteria:
Basically, this means that a stock needs to not only pay dividends for at least five consecutive years — but the earnings must be enough to pay for them. In other words, this should reduce the likelihood of dividend cuts.
DVY contains some household names like McDonald’s (MCD) and Chevron (CVX). But the average market cap of the portfolio is $12.7 billion, with 18% in small caps and 33% in mid-caps. Some include Bank of Hawaii (BOH), Watsco (WSO) and Pinnacle West Capital (PNW).
The strategy has worked out quite well. DVY’s dividend yield is 3.4% and the three-year average total return is an impressive 18.56%.
SPDR S&P Dividend (SDY) is focused on those rare companies that have raised dividends for at least two decades. Yes, it’s a high bar — and a small group to choose from — but it should be attractive for investors who are looking for stability.
Unlike some other dividend ETFs, the fund is not chock-full of mega caps. In fact, you’ll find many mid-cap companies like Cincinnati Financial (CINF), Genuine Parts (GPC) and Linear Technology (LLTC). But with their 20-year dividend histories, you can count on these companies to keep paying out in the future.
The current yield it is at an attractive 2.76%, sweetening a very nice three-year average return of 18.28%.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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