ETFs Shelter & Income

Last weekend Barrons ran a special section on ETFs.  One of the strategies they highlighted were ETFs for both growth and income.  We have long focused on this in portfolios for clients particularly those with a more conservative risk/reward posture.  Here's a little of what Barrons said.  They focused on three investment funds that we have consistently used over the years {DVY,DTN and most recently SDY}.  I'll also include the Barron's article synopsis of each of these three.

"Dozens of dividend-oriented exchange-traded funds, like the longstanding iShares Dow Jones Select Dividend Index (ticker: DVY) and State Street's SPDR S&P Dividend (SDY), offer an element that is hard to find these days—a healthy income stream. DVY has been yielding an unusually high 3.94% recently, while SDY has been offering 3.51%....Not that dividend payers are immune to a share-price free-fall, but a 2%-to-4% income cushion can make for softer landings and higher long-term returns. According to Ned Davis Research (www.ndr.com), S&P 500 companies that consistently raised dividends provided an average annualized return of 9.3% from 1972 through May 2010, versus 7.1% for dividend payers that didn't consistently hike payouts and 1.4% for non-dividend-paying stocks.....

With American companies sitting on a record $837 billion in cash, dividend payouts have started up again in earnest, reports Howard Silverblatt, Standard & Poor's senior index analyst–particularly among consumer staples issues. More than half of the S&P Dividend Aristocrats– companies that have increased dividends for 25 years running—have raised their payouts this year.

The only ETF specifically focused on this group is State Street's SDY. Its benchmark, the S&P High Yield Dividend Aristocrats Index, holds the 50 highest-yielding aristocrats of the S&P 1500. Currently in the high 40s, down from its 52-week high of $51.51, SDY is one of the largest, most liquid dividend ETFs, with assets of $2 billion and an average 429,000 shares traded daily.

SDY's prime competitor is the BlackRock iShares Dow Jones Select Dividend Index (DVY), which has $3.7 billion in assets and an average daily trading volume of 510,000 shares. It puts more emphasis on yields than SDY does. Broadly diversified across 10 market sectors, it's currently 28% weighted in utilities and 20% in consumer goods. SDY is similarly configured, but tilts toward consumer stocks more than utilities. Only about 10% of the holdings of either are financial companies. Before the 2008 meltdown, these outfits often accounted for half or more of many dividend ETFs. But since the crisis, many of these companies have slashed or eliminated their payouts.....

If you want to avoid financials, WisdomTree Dividend ex-Financials (DTN) tracks an index of high-yielding U.S. stocks outside that group. Three sectors—industrial materials, utilities and consumer goods—each account for 17% of DTN's holdings. Vanguard Dividend Appreciation is far larger, more liquid and more diversified, but is about 7% invested in financials.


*Long DTN, DVY and SDY in various client accounts.

Link:  Gimmie Shelter & Income!