As dividend exchange traded funds grow in number (and assets), each funds’ nuances become more important for investors to consider prior to allocating capital.
Popular weighting methodologies for dividend ETFs include dividend increase streaks and weighting by yield, but a plethora of other payout ETFs use different approaches. The WisdomTree LargeCap Dividend Fund (NYSEArca: DLN) is in the “different” group, but in this case, DLN’s differences have proven rewarding for long-term investors.
DLN’s underlying index, the WisdomTree LargeCap Dividend Index (WTLDI), “is dividend weighted annually to reflect the proportionate share of the aggregate cash dividends each component company is projected to pay in the coming year, based on the most recently declared dividend per share,” according to WisdomTree.
“By weighting stocks by total dollar payout, rather than by dividend yield, this fund attempts to avoid overweighting stocks that are likely to cut their dividends,” according to Morningstar analyst Micahel Rawson.
As DLN’s weighting methodology differs from rival dividend ETFs, some of its sector weights do as well. This is highlighted by DLN’s 17.2% allocation to technology stocks, the ETF’s largest sector weight by a healthy 260-basis point margin over consumer staples.
Due to the fact the ETF is not restricted by dividend increase streaks, it has been getting a boost from the likes of Apple (NasdaqGS: AAPL) and Microsoft (NasdaqGS: MSFT). Those are DLN’s two largest holdings at a combined weight of 7.5%. Microsoft’s last two dividend increases were 21.7% and 15%, respectively. Apple brought back its dividend at 37.8 cents per share quarter in 2012 and it has since grown to 47 cents a share per quarter. [Dividends and Out-Performance With This ETF]
There are other advantages to the way DLN goes about its business.
“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.