Vetting the Dividend ETFs

Karin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

According to an article in Barron's on Nov. 5, the theme of Dividend Investing has engendered approximately 2 new funds (mutual funds or ETFs) on average per month since 2008, with a commensurate doubling of Assets Under Management (AUM).

Barron’s recently screened these new funds, and discovered that many of them are not living up to their promise. Of the 53 funds that have over $100 million in AUM, and have existed for more than three years, only 24 are beating the current yield of the S&P 500 (2.1%) and only 6 have yields above 3%.

To that I say, what is the point of paying a money manager for such a weak yield??? Personally, with the analysis I have been doing and the criteria I have been using, I think I can do better than that. I am working on a new dividend model portfolio that I will present soon.

The goals with my dividend model portfolio will be an annual yield of better than 3% and annual share-price growth of 10-15%.

To make it to consideration for my dividend model portfolio, I want to see a yield of over 3.0%, a history of paying and raising dividends for at least 10 years, a 5-year Dividend Growth Rate (DGR) of 7.0% or better, and a 12-month total return of 15% (the current 12-month return of the S&P 500.) I know a total return number is not a required metric in a dividend portfolio, but I want to be sure that the yield is not high simply because the stock price has declined precipitously.

While I am developing this model portfolio, I will be taking a look at some of the more well-known dividend-specific ETFs, in order to determine what I think of their portfolios, and whether or not their top holdings will fit into my portfolio.

The largest Dividend ETF in terms of assets under management, as well as the most popular in terms of inflows in 2012 is the Vanguard Dividend Appreciation Fund (NYSEMKT: VIG). This fund has been in existence since May 2006, has a current yield of 2.1%, and a 12-month total return of 11.4%. The fund has $14.4 billion in assets. It attempts to replicate the returns of the Dividend Achievers Select Index, which consists of common stocks of companies that have a record of increasing dividends over time.

As of November 5, its 10 top holdings are IBM, Coca-Cola, Procter & Gamble, Wal-Mart, PepsiCo, Chevron, Exxon Mobil, United Technologies, McDonald’s, and 3M.

I find it very interesting that these holdings are completely different from those of the iShares Dow Jones Select Fund (NYSEMKT: DVY) that I previously reviewed.

I first sorted the companies by their dividend-paying history, based on the incredibly comprehensive worksheets developed by David Fish. Of these top ten holdings, I eliminated six (IBM, Coca-Cola, Wal-Mart, Exxon Mobil, United Technologies, and 3M) for their low yield.

Next I sorted for 12-month total return, using information obtained from ycharts.com. I eliminated two (Chevron, McDonald’s) for their low 12-month total return.

That left only two of the top ten companies in the VIG fund that I would hold in my own portfolio.

Procter& Gamble (NYSE: PG) is currently trading at approximately $67 and yields 3.3%. It has a 56-year history of paying and raising dividends, a 5-year average DGR (Dividend Growth Rate) of 11.2%, and a 12-month total return of 11.9%. The company sports a PE of 18.5 and is currently trading at 6% less than its 52-week high.

PepsiCo (NYSE: PEP) is currently trading at approximately $68 per share and yields 3.1%. It has a 40-year history of paying and raising dividends, a 5-year average DGR (Dividend Growth Rate) of 12.2%, and a 12-month total return of 15.3%. Its PE is 18.2 and it is trading at 8% less than its 52-week high.

I feel that, of the top ten holdings in the VIG fund, these two companies are very well positioned to provide stability, a future income stream, and the opportunity for price appreciation. I will definitely be considering them for the Dividend Model Portfolio that I am constructing.

 

 

 

 

 


khern0203 has no positions in the stocks mentioned above. The Motley Fool owns shares of PepsiCo. Motley Fool newsletter services recommend PepsiCo and The Procter & Gamble Company. 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!

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