Dividend Growth Via ETFs

There are about 70 dividend-focused exchange traded funds on the market, some of which have debuted this year, indicating issuers are not done rolling out new dividend funds.

Where the money is heading in the dividend ETF segment is a story worth monitoring. As Barron’s notes, dividend growth ETFs pulled in over $5 billion in new assets last year, led by the largest U.S. dividend ETF of any type, the Vanguard Dividend Appreciation ETF (NYSEArca: VIG).

But as 10-year Treasury yields have declined since the start of 2014, alleviating pressure on rate-sensitive, income-generating sectors such as utilities, some ETFs emphasizing dividend yield have seen inflows. The iShares High Dividend ETF (NYSEArca: HDV) and the Vanguard High Dividend Yield ETF (NYSEArca: VYM) stand as two prime examples, having brought in nearly $390 million combined. HDV allocates almost 15% of its weight to utilities stocks. [Bond, Utilities Bounce Helps Some Dividend ETFs]

Still, dividend growth ETFs can play important roles in portfolios, particularly if rates rise again. “The argument for U.S. dividend growers boils down to valuations and interest rates. Lower-yielding dividend shares, on average, have been unusually cheap versus higher-yielding counterparts, trading at a slight discount to the group, instead of their historical 20% premium,” reports Brendan Conway for Barron’s.

Barron’s notes that since 1986, dividend growers have kept up with the S&P 500 when interest rates increased, but high yield stocks lagged. Not surprisingly, dividend growers have a lengthy history of out-performance. From 1972 through 2012 companies that initiated or consistently raised dividends outperformed and were less volatile than the companies either did not pay, cut or kept dividends stagnant, according to Ned Davis Research.

In addition to VIG, there is a new breed of dividend growth ETFs, including WisdomTree U.S. Dividend Growth Fund (NasdaqGS: DGRW) and the FlexShares Quality Dividend Index Fund (NYSE: QDF). The important element featured in some of the newer dividend growth ETFs is sector weights to those groups that perform well as rates rise. [Some ETFs Stand Tall as Rates Rise]

Consumer discretionary, industrials and technology are usually the best-performing sectors in rising rate environments. Those are three of DGRW’s top four sector weights, combining for over 54% of the fund’s weight. Although QDF is not an explicit dividend growth ETF, nearly 37% of its lineup is allocated to those sectors compared to just 10% to rate-sensitive utilities and telecom names.