Comparing Four Different Dividend ETFs

by on April 16, 2012 | ETFs Mentioned:

Thanks to the evolution of the ETF industry, dividend investing has become even more attractive in recent years. Exchange-traded products allow investors to tap into this popular strategy with relative ease and at significantly lower costs. With dozens of dividend-focused ETFs to choose from, investors are sure to be somewhat overwhelmed as they sort through the entire lineup. One of the most crucial factors investors must consider is that not all dividend ETFs are created equal; often times, the funds utilize certain methodologies that result in vastly different portfolio compositions [see also The Truth About Alternative Weighting Methodologies (And ETFs)].

In general, dividend investing methodologies can be divided into 3 broad sub categories: dividend weighting, dividend consistency, and dividend yield focused funds. For example,  WisdomTree’s Large Cap Dividend Fund (DLN) tracks a cap- and dividend-weighted index, which gives the largest allocations to companies with the largest cash dividends. In contrast, State Street’s SPDR S&P Dividend ETF (SDY) employs the dividend consistency strategy, focusing only on stocks that have increased dividends every year for at least 25 consecutive years [see also 12 High-Yielding Commodities For 2012].

For investors who prefer higher yields over consistency, dividend yield focused funds, like SDIV, are perhaps a better option. This fund is designed to track the performance of 100 equally weighted companies that rank among the highest dividend yielding equity securities in the world. There is also the PowerShares’ High Yield Dividend Achievers Portfolio (PEY). This ETF is somewhat of a hybrid product, making it an intriguing option for investors who want to implement more than one strategy. The fund selects its underlying stocks based on dividend yields and consistency of dividend growth, resulting in a portfolio that consists of both popular blue chip stocks as well as small as companies that provide significant distributions.

To show how the nuances of the various index methodologies out there impact the risk and current return profiles of dividend-focused ETFs, take a look at how six blue chip dividend stocks are allocated across four very different dividend ETFs (including their current dividend yields):

  • High Yield Dividend Achievers Portfolio (PEY) – 3.79%
  • WisdomTree Large Cap Dividend Fund (DLN) – 2.67%
  • SPDE S&P Dividend ETF (SDY) – 2.47%
  • Global X Super Dividend ETF (SDIV) – 5.72%

AT&T (T)

Dividend Profile: Telecom giant AT&T is one of the biggest payers of dividends; the company made cash distributions to shareholders of more than $10 billion in 2011. AT&T is also known for a relatively attractive dividend yield, which generally comes in at 5% or higher. The telecom giant has one of the longest track records of dividends; it has paid out a distribution every year since 1984 and is one of the few companies that continued to increase its dividend throughout the recent financial crisis [see also Special Report: Dividend ETFs In Focus].

Dividend ETF Representation: T is a major holding of many dividend-focused ETFs.

AT&T
ETF Weight
PEY 2.8%
DLN 4.1%
SDY 3.3%
SDIV n/a

Johnson & Johnson (JNJ)

Dividend Profile: The world’s largest and most diverse health-care company, Johnson & Johnson, ranks as one of the top dividend stocks of the Dow Jones Industrial Average. JNJ first started distributing dividends to their shareholders in 1976, and since then has continuously increased distributions. The company paid out cash distributions of just over $6.15 billion in 2011 and is expected to have a 3.6% dividend yield this year.

Dividend ETF Representation: JNJ receives relatively significant weightings in four of the major dividend-focused ETFs.

JNJ
ETF Weight
PEY 1.6%
DLN 2.4%
SDY 2.0%
SDIV n/a

Verizon (VZ)

Dividend Profile: U.S. telecom company, Verizon, has been a relatively steady payer of dividends since the mid 1980′s. With the exception of 1985, 2000, and 2008, VZ has been increasing their distributions by relatively small increments. In November of 2006, however, the company issued a one time special dividend related to the spin off of Idearc of $1.31. VZ is known for its attractive dividend yield, which currently is projected to be a little over 5.3%. In 2011, the company paid out more than $5.5 billion in cash distributions.

Dividend ETF Representation: VZ is currently one of the top ten holdings of WisdomTree’s DLN.

VZ
ETF Weight
PEY n/a
DLN 2.1%
SDY n/a
SDIV n/a

Chevron (CVX)

Dividend Profile: Oil giant Chevron has a long history of paying dividends and providing relatively attractive dividend yields to its shareholders. The company began paying dividends in 1970, and has increased their cash distributions for 25 consecutive years. Chevron is one of the few companies who managed to increase their dividends throughout the recent financial crisis. Shareholders were paid over $6.2 billion in cash dividends last year: currently, the stock has a projected dividend yield of 3.2% for 2012 [see also Dividend ETF Special: 25 Equity ETFs With Attractive Distribution Yields].

Dividend ETF Representation: CVX is the 5th largest holding in WisdomTree’s DLN.

CVX
ETF Weight
PEY n/a
DLN 2.4%
SDY n/a
SDIV n/a

Microsoft (MSFT)

Dividend Profile: Leading software creator Microsoft is a relative newcomer to the world of dividend paying companies. Despite its short dividend history, its cash distributions to shareholders has been quite significant over the last couple of years. In 2004, a year after the company began distributions, Microsoft paid out a special one time dividend of $3.08. Since then, the company has been paying regular and growing dividends. Last year, Microsoft made cash distributions to shareholders of just under $5.2 billion.

Dividend ETF Representation: Even with its short dividend history, MSFT has climbed up the ranks to become DLN’s third top holding.

MSFT
ETF Weight
PEY n/a
DLN 3.0%
SDY n/a
SDIV n/a

General Electric (GE)

Dividend Profile: General Electric has one of the longest dividend histories, and until recently its shareholders relied on the stock for a steady inflow of cash distributions. The crisis of 2008 rocked the company’s financial standing, forcing them to slash dividends from 31 cents per share to a mere 10 cents. Since then, however, the company has managed to increase their cash distributions for the last 2 years. In 2011, General Electric paid out over $6.4 billion in cash dividends and ended the year with an attractive 3.41% dividend yield [see also Dividend Special: Top Companies In Every Major Commodity Sector].

Dividend ETF Representation: GE is 4th largest holding in WisdomTree’s DLN.

GE
ETF Weight
PEY n/a
DLN 2.7%
SDY n/a
SDIV n/a

Bottom Line

Although there are some overlaps in the underlying holdings of almost all  “dividend” focused ETFs, a closer look under the hood of these products reveals significant differences when it comes to various dividend methodologies. Considering how some the most-popular dividend paying companies are allocated (or completely omitted) across these four ETFs, it is safe to say that the myth of all dividend ETFs being equal is busted [For more ETF analysis, make sure to sign up for our free ETF newsletter or try a free seven day trial to ETFdb Pro].

Disclosure: No positions at time of writing.