On Thursday, nearly a quarter of the exchange traded funds to touch new all-time highs were dividend funds.
Several of those ETFs, including dividend celebrities such as the Vanguard Dividend Appreciation ETF (NYSEArca: VIG) and the SPDR S&P Dividend ETF (NYSEArca: SDY), share something in common. That being an emphasis on steadily rising payouts by focusing on companies with lengthy track records of boosting dividends.
In the case of VIG, constituent companies must have dividend increase streaks of at least a decade. SDY requires 20 years. That approach has worked as those two ETFs have a combined $31.8 billion in assets under management. [Getting Dividend Growth With ETFs]
A hidden gem among ETFs that use dividend increase streaks as part of their weighting methodology is the $352.5 million PowerShares Dividend Achievers Portfolio (NYSEArca: PFM), which also hit a new all-time Thursday.
PFM tracks the NASDAQ US Broad Dividend Achievers Index, which also mandates a minimum dividend increase streak of 10 years for inclusion. Dividend growth works for investors, as evidenced by PFM’s 32% gain over the past two years.
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.
Dividends are a sign of well-run companies and “shares of dividend-paying companies possess built-in value that makes them generally more resilient in down markets, with solid appreciation potential during earnings-driven market upturns with less price volatility,” according to NASDAQ OMX Global Indexes.
Indeed, PFM has value tilt as large-cap value names account for a third of the ETF’s weight. The value bias is also apparent at the sector level with consumer staples and energy combining for nearly 40% of the fund’s weight. [Serious Dividend Growth With This ETF]
Top holdings include Johnson & Johnson (NYSE: JNJ) 4.2%, Chevron Corp (NYSE: CVX) 4.2%, Wal-Mart Stores (NYSE: WMT) 4%, Procter & Gamble (NYSE: PG) 4% and Exxon Mobil (NYSE: XOM) 4.1%.
PFM also merits consideration as a dividend ETF to own if and when interest rates rise because the industrial, technology an consumer discretionary sectors combine for a third of the ETF’s weight. Historically, those are the three best-performing sectors when rates rise. [Fight Inflation With Dividend Growth ETFs]
PFM gained 25.7% last year as 10-year Treasury yields surged. PFM’s trailing 12-month dividend yield is 1.85% and the fund features a return on equity of 23.9%, according to PowerShares data.
PowerShares Dividend Achievers Portfolio
Tom Lydon’s clients own shares of P&G.