In addition to the obvious, with the obvious being income generation, there are myriad uses for dividend exchange traded funds.
For example, companies that are prodigious growers of their payouts have offered investors a solid avenue for beating inflation over the years. 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. [Inflation Fighting With Dividend Growth ETFs]
When it comes to dividend ETFs and interest rates, 2013 and 2014 have proven instructive for income investors. A more sanguine interest rate environment in 2014, particularly earlier in the year, has proven efficacious for dividend ETFs with emphasis on high yield stocks, including those funds with robust exposure to the utilities sector. [High Yield Dividend ETFs Top S&P 500]
When 10-year Treasury yields soared last year, ETFs emphasizing dividend growth strategies, funds that are typically light on high yield sector such as telecom and utilities, flourished. One prime example is the WisdomTree U.S. Dividend Growth Fund (NasdaqGS: DGRW), which has shine again this year.
“In May of last year, longer-term interest rates in the U.S. rose considerably on just a hint that the Federal Reserve (Fed) might begin scaling back its bonds purchases. Then, at the beginning of 2014, interest rates fell due to weaker U.S. economic data and deflationary concerns in Europe,” said WisdomTree analyst Tripp Zimmerman in a recent research note. “These two periods caused interesting differences in performance—and as the Fed plans to end its asset purchase program in October and prepares for a potential rate hike in mid- to late 2015, we think the lessons from these recent performance divergences can be important for shaping equity allocations.”
Zimmerman goes on to note that while high yielders have outperformed for much of this year, dividend growers ruled the roost last year and outperformed over the entire April 30, 2013 to Aug. 31, 2014 period.
DGRW, which debuted in late May 2013, rose 12% from its debut date through the end of the year, a period in which 10-year Treasury yields surged 49.4%. That is not surprising as a significant portion of DGRW’s weight is allocated to the technology, industrial and consumer discretionary sectors, three of the best-performing sectors when rates rise. [Some Dividend ETFs Stand Firm as Rates Rise]
Although DGRW is obviously a dividend ETF, it can be said it is also a factor ETF due to the fund’s emphasis on the quality and growth factors. DGRW emphasizes quality through a focus on firms that screen well based on return on assets and return on equity. The growth factor, in this case dividend growth, comes by way of screening for companies that generate ample free cash to support future payout growth. [An Outperforming Dividend ETF]
At the end of the first quarter, 14 of the 15 largest cash hoards among American companies belonged to companies that also pay dividends. Led by Apple (NasdaqGS: AAPL) four of those 14 are found among DGRW’s top-10 holdings. Another four are found in the ETFs next 20 holdings.
Those cash holdings and DGRW’s quality emphasis could prove important because “higher growth expectations and increased exposure to cyclical sectors could become more desirable with improving economic activity and rising rates,” adds Zimmerman.
WisdomTree U.S. Dividend Growth Fund
Todd Shriber owns shares of DGRW. Tom Lydon’s clients own shares Apple.