Dividend ETF: Diversity With a Focus on Income
There are two popular dividend exchange traded funds (ETFs). Based on assets and fund flows, Barclays iShares Dow Jones Select Dividend Index (DVY) is the leader. The competition comes in the form of PowerShare’s HighYield Dividend Achievers (PEY).
Created in 2003, Barclays Select Dividend Index holds 100 stocks from the Dow Jones U.S. Total Market Index that have increased their dividends over the last five years without ever missing or cutting a payout. To ensure its constituents are liquid and financially viable, the index also requires its members to have three-month average daily trading volumes of at least 200,000 shares and to have retained an average of 40% of their earnings in the previous five years. And rather than weight holdings based on market-cap it instead uses the dollar amount of dividends.
The PowerShares offering tracks the Mergent Dividend Achievers 50. This index includes the 50 highest-yielding members of the Dividend Achievers which in itself is a list of stocks that have increased their dividends in each of the last 10 years. It too weight its holdings by yield rather than market-cap.
Both ETFs focus most of their money in just a couple of sectors. This is a function of certain sectors being more likely to offer dividends. The Dividend Achievers, with only 50 holdings is more concentrated and keeps more than 80% of its stocks in utilities and financial issues. The Select Dividend Index puts 60% in those areas. The more narrow focus results in a larger yield for the PowerShares ETF, but it is likely to be more volatile than Barclays ETF.
Although the above mentioned products are the most popular, there are a few others you might want to consider.
- PowerShares has two more: the Dividend Achievers (PFM) which is a broader version of PEY and holds 312 stocks and High Growth Rate Dividend Achievers (PHJ) which tracks the 100 U.S. stocks with the fastest dividend-growth rates over the past decade.
- There’s the SPDR Dividend (SDY) which was assembled to measure the performance of the 50 highest-yielding U.S. stocks that have consistently raised dividends for at least 25 years.
- And there’s the Morningstar Dividend Leaders Index which consists of the 100 highest-yielding stocks in the broad U.S. market. The Morningstar offering factors in a stock’s size, or market cap, as well as the dividend yield.
One other thing to note is that these ETFs don’t hold REITs. They also end up holding midcap stocks. I for one am not interested in either of these. The income is good, but they are too focused for the type of portfolio I target.