Though some concerns have dampened the appeal of dividend stocks and ETFs over the past couple of months, investors are still praising the space thanks to the Fed’s decision to hold off on the taper.
Further, with the appointment of Janet Yellen as the likely next Fed Chairperson, many are speculating that easy monetary policies might be kept intact. As such, many are starting to believe that lower rates could prevail longer than expected, compelling investors to return to the dividend space (read: Yellen as Fed Chairwoman is Great News for These ETFs).
Faster Dividend Growth
Over the longer term (say over the past 80 years), dividends have accounted for more than 40% of total returns. The number of companies paying dividend in the S&P 500 has risen to 83%, the highest level seen in 15 years. The payout ratio stands at 31.8%, the highest since mid 2010.
As per S&P, dividend net increases (increases less decreases) grew 8.2% during Q3 as 475 companies reported dividend hikes. The trend is expected to continue in the coming months as most large companies have huge cash piles on their balance sheet and are in a position to increase payouts to shareholders.
Currently, investors are optimistic on high growth sectors like technology and finance on improving global economies and consistent increase in dividends. Over the past one year, technology has been the best dividend paying sector in the S&P 500 and would continue to lead the way higher (read: No Taper? No Problem for These Dividend ETFs).
How to Play
In such a backdrop, investors are again cycling their exposure to the dividend space as a way to achieve equity appreciation with a lower level of risk. The ETFs with a dividend-growth focus are expected to perform better over the long term compared to funds that focus on high dividend yields (see: all the Large Cap ETFs here).
Below, we have highlighted four dividend ETFs that offers excellent dividend growth potential, any of which could be a solid pick for investor in the long term:
SPDR S&P Dividend ETF (SDY)
This fund provides exposure to the 85 U.S. stocks that have been consistently increasing their dividends every year for at least 25 years. This is done by tracking the S&P High Yield Dividend Aristocrats Index.
SDY is easily one of the most popular and liquid ETF in the dividend space with AUM of over $12.4 billion and average daily volume of less than one million shares. The product is widely diversified across sectors and securities.
Each security accounts for less than 2.62% of total assets, with AT&T (T), HCP Inc. (HCP) and Consolidated Edison as the top three firms. The highest sector allocations go to consumer staples (17.81%), financials (16.96%) and industrials (14.10%).
The fund charges 35 bps in fees per year and yields 2.35% in 30-day SEC terms. The ETF has added nearly 22.7% so far this year.
Vanguard Dividend Appreciation ETF (VIG)
This is the largest and most popular ETF in the dividend space with AUM of $17.45 billion and average daily volume of more than 1.1 million shares. The fund follows the Dividend Achievers Select Index, which is composed of stocks of high quality companies that have a record of increasing dividends for at least 10 years.
Holding 146 stocks in its basket, the product is pretty spread out across various securities as none holds more than 4% of total assets. PepsiCo (PEP), Procter & Gamble (PG) and Wal-Mart Stores (WMT) are the top three elements in the basket. However, from a sector look, the ETF is heavily weighted toward consumer goods (23%), industrials (22%) and consumer services (16.50%).
With an expense ratio of 0.10%, VIG is one of the cheapest funds in this space. The 30-day SEC yield comes at 2.11%. The fund has gained nearly 21.2% in the year-to-date time frame (read: 4 Unbeatable ETF Strategies for Q4).
WisdomTree U.S. Dividend Growth ETF (DGRW)
This fund tracks the WisdomTree U.S. Dividend Growth Index and offers diversified exposure to 294 dividend-paying stocks from various sectors with growth characteristics. It has gathered $56.1 million in AUM since its debut earlier in the year and it trades in volumes of nearly 43,000 shares per day.
The product provides double-digit allocation to four sectors – industrials (20.62%), information technology (20.49%), consumer discretionary (19.79%) and consumer staples (18.09%). Apple (AAPL), Microsoft (MSFT) and PG are the top three holdings making up for a combined 12.82% share (read: 3 ETFs to Watch on Microsoft Dividend Hike).
The fund has a 30-day SEC yield of 2.04% and charges 28 bps in fees per year from investors. DGRW is up 8.4% since inception.
First Trust NASDAQ Technology Dividend Index (TDIV)
Since the technology sector is expected to be a major contributor to the overall increase in dividends, investors could find TDIV an intriguing option. This fund seeks to focus on dividend payers within the technology sector by tracking the Nasdaq Technology Dividend Index.
The fund has accumulated $215.2 million in its asset base and trades in volume of roughly 92,000 shares a day on average. In total, the fund holds 87 securities in its basket. Intel (INTC), MSFT and International Business Machines (IBM) occupy the top three positions in the basket with nearly 24% of assets.
In terms of sector exposure, about one-fourth of the portfolio is tilted toward semiconductor and semiconductor equipment while software, and computer and peripherals make up for 14% share each.
The ETF sports a 30-day SEC yield of 2.90% and has an expense ratio of 0.50%. TDIV gained 20% so far this year.
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