Dividends, both foreign and domestic, are on the move higher.
Global dividend reached $1.03 trillion last year with S&P 500 member payouts rising to a record of nearly $312 billion. [At Least EM Dividends are Rising]
Seemingly alongside rising payouts, the number of dividend-focused exchange traded funds is increasing as well with an emerging theme being an emphasis on dividend growth. It is easy to see why. Savvy income investors know the advantages of stocks that raise payouts in “set your clock by it” fashion. 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. [Dividend Growth Via ETFs]
Dividend growth not only fosters added income and returns, but can also act as an inflation-fighting tool. Since the early 1970s, when inflation ran as high as 11% per year, aggregate annual dividends of the S&P 500 have grown more than 1,000%, to $34.99 from $3.16 a share, Maxwell Murphy reports for the Wall Street Journal, citing Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
That $3.16 per share would be worth $19.05 today, the Journal reports, indicating dividend growth has easily trumped inflation. “Since the early 1980s, another rough period for inflation, dividends have grown 519%, and that is 2.8 times the rate of inflation. But since 2010, dividends have outpaced inflation by nearly eight times,” according to the Journal.
Dividend growth as a means of trumping inflation could and arguably should serve to highlight the advantages of the ETFs that focus on dividend growth stocks. That group is comprised of well-established ETFs that emphasize dividend increase streaks as well as a new breed of funds that look for sectors chock full of stocks that have the potential to be future sources of dividend growth. [Not Quite Your Grandad’s Dividend ETF]
The Vanguard Dividend Appreciation ETF (NYSEArca: VIG) has become the largest U.S. dividend ETF due to a combination of low fees (at 0.1% per year, VIG is cheaper than 91% of rival products) and dependable constituent dividends. VIG tracks the NASDAQ US Dividend Achievers Dividend Index, which requires at least 10 straight years of dividend increases for entry. [These Dividend Indices Delivered in 2013]
The NASDAQ US Broad Dividend Achievers Index, the underlying index for the PowerShares Dividend Achievers Portfolio (NYSEArca: PFM), also requires dividend increase streaks of at least decade. The SPDR S&P Dividend ETF (NYSEArca: SDY) and the ProShares S&P 500 Aristocrats ETF (NYSEArca: NOBL) go even as the dividend aristocrats indices tracked by those funds require dividend increase streaks of 25 years.
In particular, VIG and SDY have proven wildly successful with ETF income investors, but some newer ETFs could prove to be credible dividend growth options and, as a result, legitimate inflation-fighting funds as well.
For example, the WisdomTree U.S. Dividend Growth Fund (NasdaqGM: DGRW) emphasizes sectors that have recently shown a penchant for raising dividends, such as technology and consumer discretionary. Those sectors, two of the largest contributors to S&P 500 dividend growth over the past several years, combine for over 38% of DGRW’s weight. DGRW’s weight of 20.4% to tech is large among dividend ETFs because the sector’s recent dividend growth has not yet resulted in long enough increase streaks to qualify it for a large footprint in some of the aforementioned ETFs.
The First Trust NASDAQ Rising Dividend Achievers ETF (NasdaqGM: RDVY), which debuted earlier this year, allocates almost 42% of its combined weight to tech and financial services names. Despite the recent rebound in bank dividends, one that is expected to be ongoing, the dividend cuts seen during the financial crisis resulted in reduced weights to financials for ETFs that focus on payout increase streaks. [ETFs for Rising Bank Dividends]
RDVY has an almost 46% combined weight to tech, industrial and discretionary names while DGRW’s exposure to those sectors is almost 55%, highlighting the utility of those funds as not only inflation-fighters, but durable options for rising rate environments as well. [Dividend ETFs for Rising Interest Rates]
WisdomTree U.S. Dividend Growth Fund Sector Weights
