“By weighting the stocks by dollar amount of dividends, the risky company gets a small weighting. On the other hand, a portfolio that weights based on dividend yield would put its largest weighting in the volatile small-cap company. Because larger companies tend to pay out more in absolute dollars, the fund’s dividend weighting approach balances yield against market capitalization. As a result, the portfolio isn’t dominated by either low-yielding mega-cap stocks or very high-yielding, risky names (as might result from a naive dividend-yield approach),” adds Rawson.
Due to the tilt toward larger companies that have the balance sheets to promote dividend growth, DLN is heavily allocated to some sectors income investors have come to depend, including consumer staples, health care and energy. Those stocks combine for about 37% of the ETF’s weight. [Dividend ETF Throws Its Weight Around]
DLN has a distribution yield of 2.53% and pays a monthly dividend. The ETF’s expense ratio of 0.38% is by no means expensive, but it is higher than some rival funds. However, as the chart below indicates, investors have done well by tolerating DLN’s slightly higher fees over an inexpensive rival that emphasizes dividend increase strikes.
Chart Courtesy: ETF Replay
Tom Lydon’s clients own shares of Apple.