Well, it happened — again. The 10-year Treasury fell all the way to 2.3% last week on a string of bad geopolitical news and mixed economic data. The last time yields were this low was June of last year, in the early stages of the “Taper Tantrum.”
Could yields continue to go lower? Sure, they could. But it doesn’t matter. If you are an income investor with more than a five year horizon, you should be looking outside of the bond market for your income needs given the pitifully low yields on offer. And one area that still looks attractive at today’s prices is the world of dividend ETFs.
Company dividends — unlike bond interest — generally rise over time, giving dividend stocks far better long-term inflation protection than bonds.
Not all dividend stocks are the same; some are slow-growth dinosaurs that are little better than bonds with respect to their sensitivity to rising interest rates. Others are high-growth dynamos that share their bounty with their investors by continually raising their dividend. And in the same way, not all dividend ETFs are the same. Some are concentrated in slower-growth companies and sectors, while others are a who’s who list of quality growth stocks.
I don’t like choosing between growth and income; I want both. And today, I’m going to share some of my favorite dividend ETFs that I expect to deliver the two.
Dividend ETFs – iShares Select Dividend ETF (DVY)
DVY Dividend Yield: 3.1%
Any discussion of dividend ETFs should start with the granddaddy of them all, the iShares Select Dividend ETF (DVY).
DVY’s underlying index takes the universe of dividend stocks with a positive dividend-per-share growth rate, a payout ratio of 60% or less, and at least a five-year track record of dividend payment — then it picks out the 100 best yielders of the group.
Not surprisingly, DVY is heavily weighted in utilities and defensive consumer staples, currently 34% and 15% of the portfolio, respectively. The fund’s current dividend yield is 3.1% — significantly higher than what the 10-year Treasury pays.
As it is currently constructed, DVY is not likely to outperform the S&P 500 in a normal, rising market. It should, however, hold up far better during a market rout — though this was not the case during the last bear market. DVY took a beating in 2008 because it had a high allocation to the financial sector at the time. Not so this time.
Dividend ETFs – Vanguard Dividend Appreciation ETF (VIG)
VIG Dividend Yield: X
DVY is fine for current income. But if it is growth you seek, try shares of the Vanguard Dividend Appreciation ETF (VIG) — a long-time favorite of mine. At 2%, VIG’s yield is not significantly higher than the S&P 500. But you don’t buy VIG for its dividend today; you buy it for its dividend tomorrow.
VIG is based on the Dividend Achievers Select Index, which requires its constituents to have at least 10 consecutive years of rising dividends. The rationale is easy enough to understand. There is no signal more powerful than that of a rising dividend. Company boards hate parting with their cash; it’s a natural human instinct to stockpile it — just in case. A willingness to part with the cash is a signal that management sees a lot more of it coming.
Paying a dividend requires discipline, as it means less cash to waste on value-destroying empire building. And a rising dividend also shows that management knows its place. They work for you, the shareholder, and increasing your dividend every year is a way of showing that they have their priorities straight.
By definition, any stock currently in the portfolio continued to raise its dividend even during the crisis years of 2008 and 2009. These are companies like Johnson & Johnson (JNJ) and IBM (IBM), which can survive Armageddon because … frankly, they already have.
There are drawbacks to VIG’s 10-year screening criteria. A more recent dividend-raising powerhouse like Apple (AAPL) lacks the history to be included in this Vanguard ETF. Also, as with any investment strategy that depends on historical data, there is no guarantee that a 10-year streak of raising dividends in the past will mean another good 10 years of increased payouts going forward.
Still, if you’re looking for a portfolio high-quality stocks with a long history of rewarding shareholders, then VIG’s dividend growth methodology is a fine place to start.
Dividend ETFs – AdvisorShares Athena High Dividend ETF (DIVI)
DIVI Dividend Yield: 5%*
DIVI is managed by Thomas Howard, a former academic turned money manager superstar and the author of Behavioral Portfolio Management. It also is very different from all other dividend ETFs I follow. Virtually uniquely among dividend ETFs, DIVI includes equity real estate investment trusts, mortgage REITs, master limited partnerships, closed-end funds and business development companies in its investment universe, giving it a vastly different portfolio composition than its competitors.
Also uniquely among dividend ETF, DIVI employs a guru-following strategy that makes it similar in principle to Global X Top Guru Holdings Index ETF (GURU) and the AlphaClone Alternative Alpha ETF (ALFA), but it involves much more active management. DIVI uses Howard’s behavioral research to identify the “high conviction” picks of active mutual fund managers, then selects high-dividend payers from the screen. DIVI then diversifies across sector, strategy and country to reduce risk.
DIVI charges 0.99% in expenses, which is a little on the expensive side for a dividend ETF, but given that DIVI essentially is an actively managed mutual fund in an ETF wrapper, the expenses are not disproportionate.
*DIVI has been trading for less than a month and thus has no historical dividend yield. Based on the average yield of its top holdings, minus manager fees and expenses, I believe that it will generate in excess of 5% per year in dividends and perhaps more.
Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.