As has been noted numerous times, 2014 has been another memorable year for dividend stocks and the exchange traded funds that hold those shares.
When it comes to dividend ETFs, however, the leaders of the pack share something in common: A large weight to the utilities sector. With 10-year Treasury yields off 25.6% and various bouts of market volatility giving investors reason to embrace stodgy, high-yielding utilities, the sector is poised to be the top performer in the S&P 500 this year.
With just a few trading days left in 2014, the Utilities Select Sector SPDR (NYSEArca: XLU) enjoys a healthy lead over the Health Care Select Sector SPDR (NYSEArca: XLV) for top honors among the nine sector SPDRs while dividend ETFs with sizable utilities weights have been noteworthy performers as well. [Soaring Dividend ETFs With Big Utilities Weights]
That group includes the Global X SuperDividend U.S. ETF (NYSEArca: DIV), which has gained nearly 13% this year. DIV follows 50 of the highest dividend yielding equity securities in the U.S. and equally weights its components. The fund allocates 21.4% of its weight to utilities, its largest sector allocation.
The fund also includes a low-volatility filter to diminish volatility in the portfolio. Specifically, underlying holdings must have a beta of less than 0.85 relative to the S&P 500 to be included in the index. Beta is a measure of volatility, and stocks with 1 reading reflects perfect correlation, so anything below 1 suggests the security is less volatile than the market. [A Dividend ETF Right for the Times]
Interestingly, DIV’s payout shrank during its first 16 months on the market, but the good news it has recently been rising, DIV’s dividend is paid on a monthly basis.
“We can see that the dividend for DIV had been declining for the first 16 months since inception, and then has increased the last 5 months. Given the high concentration of MLPs and mREITs in DIV, which are stock types that have high but unpredictable payouts, investors should understand that the higher yield of DIV is being generated at the expense of dividend stability,” according to post by Stanford Chemist on Seeking Alpha.
DIV’s common stock holdings such as Altria (NYSE: MO) and Dow components AT&T (NYSE: T), Chevron (NYSE: CVX) and Verizon (NYSE: VZ) have lengthy dividend increase streaks.
The point about DIV’s exposure to MLPs and mortgage REITs is an important. Combine those asset classes with utilities stocks and that’s 58.5% of DIV’s weight, indicating the ETF could be vulnerable in the event interest rates rise. When 10-year yields jumped in 2013, DIV rose just 8.5%, barely more than a quarter of the S&P 500’s gain for the year.
However, if the Federal Reserve is slow to raise rates, it would not be surprising to see DIV continue its torrid asset-gathering pace set this year. The ETF is now home to $300.5 million in assets after topping $100 million in June. [Global X Income ETFs Gain Big Assets]
Global X SuperDividend U.S. ETF
