An Almost Durable Dividend ETF

Given the current volatile state of the U.S. equities market, this should be the time when conservative, low beta, dividend-paying stocks provide investors with some shelter from the storm.

At the very least, those groups should be less bad than other corners of the market and that is excactly what the First Trust Morningstar Dividend Leaders Index Fund (NYSEArca: FDL) has been: Less bad. Over the past month while the S&P 500 has shed 6.5%, the First Trust Morningstar Dividend Leaders Index Fund is off 4.5%.

Not surprisingly, FDL’s “secret” lies in its conservatively-postured sector weights. Utilities, currently the S&P 500’s top-performing sector on a year-to-date basis, account for 24.5% of FDL’s weight. Telecom comes next at 19.6%. Importantly, nearly all of the ETF’s telecom weight is allocated to Dow components AT&T (NYSE: T) and Verizon (NYSE: VZ), which are FDL’s two largest individual holdings. That is important because while those stocks have been relatively durable, there has been noticeable deterioration in smaller telecom names. [Telecom ETFs Betray Conservative Reputations]

FDL, which has a 12-month distribution rate of 3.35% and a four-star Morningstar rating, tracks the Morningstar Dividend Leaders Index. That index “captures the performance of 100 highest yielding stocks that have a consistent record of dividend payment and have the ability to sustain their dividend payments,” according to Morningstar.

That index methodology implies some devotion to dividend growth by way of dependable payout increases, something several of FDL’s largest holdings have been doing for decades. And despite its allocations to rate-sensitive utilities and telecom names, that does not mean FDL is destined for failure if interest rates rise.

The ETF rose nearly 23% last year even as 10-year yields surged. At issue is by how much do utilities-heavy dividend ETFs lag rivals that are not heavily exposed to that sector. The 2013 Treasury yield spike highlighted the vulnerabilities of dividend ETFs with large telecom and utilities allocations. [Dialing up a Dividend ETF]