A Tortoise-Like Dividend ETF That Delivers Hare-Like Returns
Jeff is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
An often over-looked investment theme is based on dividend income. Such strategies seem so boring in that they keep chugging along collecting dividends on a regular basis. There seems to be very little sex appeal to these strategies, especially when the media reports on day-to-day activities of companies such as Apple or Google. The media comments of such companies take all the stage when earnings or other high-impact news developments are released.
The iShares Dow Jones Select Dividend ETF (NYSEMKT: DVY) is based on the income of US stocks with positive dividend histories. As of April 29, there were 101 different stocks in this ETF. The one-year return is posted at approximately 19.3%, the three-year return is reported at 15% and the five-year return shows a 5.9% return. Market events of 2008/2009 are impacting this measurement.
This is a well-balanced and diversified fund. While I do not like some of the representative stocks in the index, as a whole this strategy is a mainstay for the average investor who wants to avoid the whipsaws of price changes in individual stocks that are subject to the whims of the public. Below is a table of allocations to sectors and a one-year price chart.
As of April 25, the first position by weighting is Lorillard. The portion that Lorillard has in the iShares Dow Jones Select Dividend Index Fund is approximately 3.6%. There are only 101 stocks held in this ETF and the lack of concentration to any one stock gives a good story to the benefits of diversification.
Effective Jan. 16, a three-for-one stock split was completed. The board of directors continues to believe in the brands and strategic direction of the company. What's interesting is that a $500 million share-repurchase program was announced less than 60 days after the split took effect. The chart below is split adjusted.
This leaves the question as to what the net effect of shares will be. Due the flexibility of Lorillard to time the purchases during 2013, how this may affect quarterly per-share earnings results? These are both rhetorical questions only.
My personal opinion is that this is a tobacco company and I have a hard time with profits from consumer products that are extremely harmful. Regardless of my personal opinion, such companies continue to flourish.
The next stock held is Lockheed Martin. The holding of the iShares Dow Jones Select Dividend Index Fund in this stock is 2.7%. Lockheed Martin is a large defense contractor. Comments in the local press state the representatives of Lockheed Martin and hired lobbyists have been among the largest protesters of sequestration. With corporate headquarters in Bethesda, Md., it's easy for such individuals to drive down Wisconsin Avenue into Washington DC in a matter of minutes.
Looking at information posted on the investor relations website page, I find a similar pattern of decreased income and increased net income from the prior reporting period, and the announcement of a completed share-buyback program. Comments regarding sequestration are made in the closing paragraph and an optimistic CEO believes Lockheed Martin Corp will prevail. See the price chart below.
While doing business with government is very profitable and has a high barrier for competition to enter, the concentrated risk to one customer poses risks that can lead to disruptions in financial performance. The main reason why Lockheed Martin is part of the iShares Dow Jones Select Dividend Index Fund is the historical dividend rates paid. It remains to be seen just how devastating sequestration is to Lockheed Martin.
The third position of holdings by weighting in the iShares Dow Jones Select Dividend Index Fund goes to Chevron (NYSE: CVX). The holding is 2.2% of this ETF. I like Chevron and have spoken highly about it in another blog. The five-year dividend growth rate is more than 9% and I don't see anything on the horizon that will interfere with this. See the price chart below. This is a well-managed oil company that is not overly burdened with investment into new income-producing projects. See price chart below.
Rounding out the top four of the iShares Dow Jones Select Dividend Index Fund brings Entergy (NYSE: ETR) to the table. The weighting as of the same date is 2% of this ETF.
Entergy is an electricity utility that serves the Southwestern US. Nuclear power plants are owned and operated in the northern part of the US. Recent comments by management include the fact that Entergy was added to the Corporate Responsibility Magazine’s 100 best corporate citizens list.
Earnings for the first quarter of 2013 were reported at $0.90 per share, a $1.76 increase from the first quarter of 2012’s loss of ($0.86) per share. Increases in market share are also reported and efficiency in cash flows has also helped the financial performance.
Even though utilities as a whole tend to be stodgy and not exciting, Entergy appears to be one electric that has endured some challenging times and is coming back with a renewed strength. As a contributor to this dividend based ETF, holding shares in Entergy as a stand-alone investment offers some opportunities. I like this stock due to the significant measured recent positive performance. See the chart below.
The overlooked power of dividends as a long-term source of return tends to give such strategies an appearance of less than stellar. Actually this is not so true during periods of market corrections. Buying shares in an ETF such as the iShares Dow Jones Select Dividend Index Fund has the ability to profit during good times and “not to lose as much” during bad.
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Jeff Stouffer has no position in any stocks mentioned. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!