When it comes to dividend-oriented ETFs, advisors have many choices. But if you are looking for a domestic portfolio of dividend growth stocks -- one that includes only stocks that have posted higher shareholder payments for a specific number of years -- your choices shrink to a handful.
The requisite number of years of rising dividends varies among ETFs, from five to 25, depending on the rules of the underlying index. The longer a company has increased its dividend, the more wedded it is to that policy -- but at the other end of the spectrum, dividend newbies are more likely to provide hefty increases in the early years of dividend payments.
So how should you choose an ETF? Here are returns, expense ratios and other data for the available domestic dividend growth ETFs -- including three new ETFs based on new indexes from Morningstar, Russell, and S&P Dow Jones. Products are sorted by the number of years of higher payments required, in ascending order; data is from Morningstar and fund websites as of Feb. 27. Three- and five- year returns are annualized. Click to view a slideshow version here.
The iShares Core Dividend Growth ETF (DGRO) was launched in June 2014 and is based on the Morningstar U.S. Dividend Growth index, introduced in April of that year. The index requires that a constituent security pay qualified income (i.e., no REITs or limited partnerships), have at least five years of uninterrupted dividend growth, and pay out less than 75% of earnings.
In addition, the index excludes those stocks whose yield is in the top 10% of that universe. Although Morningstar does not indicate the reason for the exclusion, most dividend experts recognize that the top yielders may include stocks that have sold off in anticipation of a dividend cut.
New arrival ProShares Russell 2000 Dividend Growers (SMDV), which launched in February 2015, is based on the Russell 2000 Dividend Growth index. That index is a subset of the small-cap Russell 2000 and is constructed to include at least 40 companies that have increased dividends for at least 10 consecutive years. If there are fewer than 40 qualifying companies, the index may be filled in with stocks having shorter dividend growth histories. No sector may be more than 30% of the index and stocks are equal weighted.
Three other ETFs are based on variations of the NASDAQ U.S. Broad Dividend Achievers index, a modified market cap-weighted index that requires 10 consecutive years of higher dividend payments for a stock's inclusion. In the PowerShares Dividend Achievers (PFM), each stock is limited at quarterly rebalancing to a maximum weighting of 4%. Like the underlying index, it includes REITs and LPs.
PowerShares High Yield Equity Dividend Achievers (PEY), launched in 2004, is the oldest ETF based on a Dividend Achievers index -- in this case, the NASDAQ U.S. Dividend Achievers 50, limited to 50 stocks. Because of that limitation, no sector can have more than 12 stocks included. Sectors are also limited to a 25% weighting and individual stocks 4%. The portfolio is weighted by dividend yield and excludes REITs and LPs.
Vanguard Dividend Appreciation (VIG), the biggest dividend growth ETF in terms of assets, is based on the NASDAQ US Dividend Achievers Select index. This permutation of the basic Dividend Achievers benchmark is capitalization weighted and also excludes REITs and LPs. In addition, Nasdaq applies other "proprietary" criteria, which have never been disclosed.
ProShares S&P MidCap 400 Dividend Aristocrats (REGL) is another recent ETF addition (launched in February); this one is based on a new version of the oldest dividend growth benchmark, the S&P Dividend Aristocrats. The midcap iteration features 15 years of increases. If there are not enough midcap stocks with a sufficient number of increases to have at least 40 issues in the index, the index is filled out with issues ranked by the length of their dividend increase record and then by yield.
No sector can be more than 30% of the index. Stocks are equal weighted.
SPDR S&P Dividend (SDY), an early dividend growth ETF (launched in 2005), is based on the S&P High Yield Dividend Aristocrats index, which includes stocks of all capitalizations. Inclusion requires 20 consecutive years of dividend increases. No stock can exceed 4% of the index and weighting is by dividend yield.
ProShares S&P 500 Dividend Aristocrats (NOBL) tracks an index of large-cap stocks that have boosted shareholder payments for 25 consecutive years. If fewer than 40 stocks in the S&P 500 index qualify, the requirement is reduced to 20 years to fill in the index in descending order of yield. No sector can be more than 30% of the index. Stocks are equal weighted.
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