The third quarter was another good one of U.S. dividend growth with dividend (increases less decreases) totaling $12.3 billion, up from $11.9 billion a year earlier, according to S&P Dow Jones Indices.
“For the 12-months ending September 2014, dividend payments have increased by 27.4%, or $55.5 billion, compared to an increase of $43.6 billion in the 12-months ending September 2013,” said the index provider in a statement.
With ongoing U.S. dividend growth has come accelerating growth for dividend exchange traded funds. During the third quarter, of the four largest U.S. dividend ETFs, only the Vanguard Dividend Appreciation (NYSEArca: VIG) saw outflows. VIG, the largest dividend ETF, lost $178.2 million, but that was canceled out by the nearly $180 million investors allocated to the SPDR S&P Dividend ETF (NYSEArca: SDY). [Different Dividend ETFs for Different Income Investors]
The Vanguard High Dividend Yield ETF (NYSEArca: VYM) and the iShares Select Dividend ETF (NYSEArca: DVY) took in over $813 million combined during the July through September period.
“The good news continued for dividends in the third quarter, as the increase in the declared (announced) indicated rate is close to hitting a double-digit, year-to-date gain,” says Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices. “Given the number of those issuers which have a history of Q4 dividend increases, 2014 should post another double-digit gain. Along with the permanent lower tax rate on qualified dividends, investors will feel like they are getting a raise.”
Over 84% of S&P 500 member companies and all 30 firms in the Dow Jones Industrial Average were dividend payers in the third quarter and “Silverblatt found that 67.5% and 51.2% of issues within the S&P MidCap 400 and S&P SmallCap 600 respectively, pay dividends, both up from 66.8% and 50.2% in Q2,” according to S&P Dow Jones Indices.
Not only are small-cap dividends on the rise, but ETFs that focus on smaller, dividend-paying stocks have been noticeably less bad than their non-dividend counterparts. For example, the WisdomTree SmallCap Dividend Fund (NYSEArca: DES) is off 4.4% this year while the iShares Russell 2000 ETF (NYSEArca: IWM) is lower by 6.3%. [Small-Cap Dividend ETFs Prove Less Bad]
The chasm between dividend-paying and dividend-growing mid-caps and their non-dividend equivalents is even more pronounced. The WisdomTree MidCap Dividend Fund (NYSEArca: DON), which through the first half of this year was topped by just four other WisdomTree ETF, is up 4% year-to-date compared to a 1% gain for the S&P MidCap 400 Index. [Mid-Cap Dividend ETFs Keep Shining]
“On a sector basis, using the S&P 1500 as the benchmark for U.S. domestic common issues, Silverblatt noted that 1,000 issues now pay regular cash dividends, up from 990 at the end of Q2, with Financials and Industrials both adding 4 issues during Q3. 89.9% of the issues in Financials sector paid a cash dividend, compared to only 38.6% of the Technology sector,” according to S&P Dow Jones Indices.
Due to the facts that financials were dividend cutters during the financial crisis and the concept of tech dividends is still relatively new, ETFs that emphasize dividend increase streaks as part of their weighting methodology are often light on one or both of those sectors.
Perhaps not coincidentally, of the four largest U.S. dividend ETFs, VYM is by far the top performer this year with a 7.6% year-to-date gain. That ETF does not emphasize length of dividend increase streaks and features a combined 30% weight to financials and technology.
The FlexShares Quality Dividend Index Fund (NYSEArca: QDF), which is fast approaching its second anniversary, features a nearly 35% combined weight to the financial services and technology sectors.
Like many ETFs, QDF emphasizes the quality factor, of which a company’s ability to generate free cash and dividend growth and stability are integral tenants. QDF tries to reflect the performance of the Northern Trust Quality Dividend Index, which holds high-quality income-oriented U.S. companies with a targeted overall beta similar to the Northern Trust 1250 Index, or the parent index.
QDF’s quality emphasis implies a safer payout and more room for potential dividend growth. A recent study of U.S. dividend ETFs by Credit Suisse assessing the safety of the payouts of those funds’ underlying holdings found that QDF has one of the safest fixed coverage ratios.
Of QDF’s top-20 holdings, six are either technology or bank stocks. Apple (NasdaqGS: AAPL) and Wells Fargo (NYSE: WFC) are the ETF’s two largest holdings combining for over 9% of the fund’s weight. [A Dividend ETF Flex its Muscles]
Vanguard High Dividend Yield ETF
Tom Lydon’s clients own shares of DVY, IWM and Apple.