When Size Mat­ters

De­spite the ar­ray of po­ten­tial op­tions for div­i­dend ETFS, a se­lect hand­ful get the most at­ten­tion.

Financial Planning - - Contents - BY JOSEPH LISANTI

De­spite the ar­ray of po­ten­tial op­tions for div­i­dend ETFS, a se­lect hand­ful of names gets the most at­ten­tion.

Baskin-rob­bins, with its 31 ice cream fla­vors, has noth­ing on the ETF in­dus­try. Ad­vi­sors seek­ing div­i­dend-fo­cused ETFS for their clients have more than 150 to choose from.

But even with that ar­ray of fla­vors at in­vestors’ dis­posal, it’s of­ten the port­fo­lios at the top of the as­set heap that get the nod. Why? Sta­bil­ity for one — those big­ger ETFS are not about to fold be­cause of in­ad­e­quate in­vestor in­ter­est.

An­other rea­son these ETFS have grown so large is sim­ple brand-name recog­ni­tion. They’re from the big as­set man­agers your clients rec­og­nize.

In­deed, their spon­sors rep­re­sent four of the five largest as­set gath­er­ers in the ETF in­dus­try. Cost is an­other fac­tor: Three of the five are among the cheap­est ETFS avail­able. And don’t for­get se­nior­ity: Four of the five are among the old­est div­i­dend ETFS avail­able to in­vestors.

To be sure, this doesn’t mean clients need to ig­nore the rest of the field. If they want to fo­cus on div­i­dends from small- or mid-cap com­pa­nies, there are ETFS that con­cen­trate on them. Or, if you want to cast a wider net, there are other op­tions. All of the big five screen out some pay­ers, but if clients pre­fer ev­ery­thing avail­able, Wis­domtree spe­cial­izes in port­fo­lios that in­clude all div­i­dend pay­ers in a given mar­ket or cap­i­tal­iza­tion seg­ment.

Three of the five big­gest div­i­dend ETFS are some of the cheap­est in the in­dus­try, and four of them are among the old­est.

Your choices will be de­ter­mined by your clients’ needs. But for an all-pur­pose gen­eral div­i­dend ETF, con­sider these five big names. Here’s a closer look at how these five div­i­dend ETFS dif­fer:

Vanguard Div­i­dend Ap­pre­ci­a­tion ETF (VIG, ex­pense ra­tio: 0.08%) is the big­gest div­i­dend ETF with $30.21 bil­lion in as­sets. It’s based on the Nas­daq U.S. Div­i­dend Achiev­ers Se­lect In­dex, which re­quires 10 con­sec­u­tive years of div­i­dend in­creases and ex­cludes lim­ited part­ner­ships and REITS. The ETF, which went pub­lic in April 2006, also ap­plies pro­pri­etary screen­ing cri­te­ria that are not dis­closed by Nas­daq or Vanguard. Be­cause Vanguard does not re­veal end-of-month hold­ings un­til the mid­dle of the fol­low­ing month, we can say that as of Oct. 30, VIG owned 182 stocks and that the largest sec­tor hold­ings were in­dus­tri­als (31.1%), con­sumer

ser­vices (21.3%) and health care (12.80%). For the year ended Nov. 27, VIG had a to­tal re­turn of 8.88%. Morn­ingstar es­ti­mates its for­ward div­i­dend yield at 2.02%.

Vanguard High Div­i­dend Yield ETF (VYM, 0.08%), launched in Novem­ber 2006, has $22.1 bil­lion in as­sets. The fund is based on the FTSE High Div­i­dend Yield In­dex, a sub­set of the FTSE USA In­dex. All the div­i­dend pay­ers in that in­dex are ranked by their in­di­cated 12-month con­sen­sus div­i­dend yield and roughly the top half of that uni­verse con­sti­tutes the bench­mark. REITS are ex­cluded.

At the end of Oc­to­ber, it held 402 stocks with the largest con­cen­tra­tions in fi­nan­cials (15.70%), health care (13.80%) and con­sumer goods (13.40%). Through Nov. 27, the port­fo­lio had a 12-month to­tal re­turn of 4.52%. Morn­ingstar es­ti­mates its for­ward yield at 3.24%.

ishares Se­lect Div­i­dend ETF (DVY, 0.39%) is based on the Dow Jones U.S. Se­lect Div­i­dend In­dex. That in­dex ex­cludes REITS and re­quires con­stituent com­pa­nies to have a five-year non-neg­a­tive div­i­dend-per-share growth rate, div­i­dends paid in each of the past five years, earn­ings that are at least 67% higher than div­i­dends on av­er­age for the past five years, and non-neg­a­tive trail­ing 12-month earn­ings per share. The in­dex (and re­sult­ing ETF) in­cludes the top 100 qual­i­fy­ing com­pa­nies as mea­sured by div­i­dend yield. Avail­able since Novem­ber 2003, the fund has $16.78 bil­lion in as­sets. Largest sec­tor po­si­tions are util­i­ties (31.63%), con­sumer dis­cre­tionary (13.51%) and en­ergy (10.55%). It had a one-year to­tal re­turn of 3.97% through Nov. 27. Es­ti­mated for­ward yield is 3.93%.

SPDR S&P Div­i­dend ETF (SDY, 0.35%) fol­lows the S&P High Yield Div­i­dend Aris­to­crats In­dex, which re­quires 20 con­sec­u­tive years of share­holder pay­ment in­creases. The in­dex is weighted by an­nual div­i­dend yield; stocks are drawn from the S&P Com­pos­ite 1500 In­dex. The ETF, avail­able since Novem­ber 2005, has $16.08 bil­lion in as­sets and holds 111 stocks. Sec­tor leaders are fi­nan­cials (16.35%), in­dus­tri­als (16.17%), and con­sumer sta­ples (15.58%). SDY re­turned 7.37 for the year ended Nov. 27. Morn­ingstar es­ti­mates the for­ward yield at 2.86%.

There are more than 150 div­i­dend ETFS, in­clud­ing small- and mid­cap op­tions. Still, just five get the lion’s share of the at­ten­tion.

Sch­wab U.S. Div­i­dend Eq­uity ETF (SCHD, 0.07%) tracks the Dow Jones U.S. Div­i­dend 100 In­dex, which re­quires mem­ber com­pa­nies to have paid div­i­dends for at least 10 years and have a min­i­mum mar­ket cap of $500 mil­lion. REITS are ex­cluded. Po­ten­tial in­dex com­po­nents are screened on four fac­tors: cash flow to to­tal debt, re­turn on eq­uity, div­i­dend yield, and five-year div­i­dend growth. Is­sues are ranked by yield and the top 100 are in­cluded. Launched in Oc­to­ber 2011, SCHD has $8.04 bil­lion in as­sets. Through Nov. 27, the fund had a one-year to­tal re­turn of 4.77%. Morn­ingstar cat­e­go­rizes its sec­tor hold­ings as con­sumer de­fen­sive (25.32%), in­dus­tri­als (21.41%) and tech­nol­ogy (16.93%). Es­ti­mated for­ward yield is 3.24%.

There are more fla­vors of div­i­dend ETFS than ice cream. Spoiler: Ice cream is tastier, but ETFS have fewer calo­ries.

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