Dividend ETFs Offer Tempting Yields

Saturday, January 9, 2010

High-dividend stocks offered poor defense during the 2008 Crash. But in 2009 they rebounded sharply despite plummeting yields. Both periods were uncharacteristic of this classic safe-haven asset class. In 2010 the question is whether it is being bid up excessively by investors fleeing low-yield bonds.

Broad-based high dividend stock ETFs kept pace with the general market with important variations.

In 2009 Vanguard Dividend Appreciation ETF (AMEX:VIG), with yield of 2.1%, soared above the pack, showing strength for a second year. SPDR S&P Dividend ETF (NYSEArca:SDY), with a strong yield of 4.1%, shed its previous volatility and paced the S&P 500. Vanguard High Dividend Yield ETF (AMEX:VYM) and WisdomTree Total Dividend ETF (NYSEArca:DTD), with yield of 2.9%, lagged the broad market modestly.

More US companies cut their dividends in 2009 and fewer raised them than any other year on record, according to Standard & Poor's. The market obviously anticipated this in 2008, and in 2009 it began to price in a firming of dividend streams for 2010. Right on cue, 4th Quarter of 2009 was a notable improvement over a dismal 3rd Quarter, showing an improving trend.

A good stock yield these days is 3-4%. But this is still strong relative to Treasuries which pay out negligible and in some cases negative inflation-adjusted interest rates. Investment-grade bonds are in mid-single digits but offer no equity upside.

Long-term bond players like Bill Gross are so dismayed by bond yields that even they are touting high-yield stocks. But like the rest of the market, in early 2010 these stocks approached relatively full valuation by most accounts. Unlike true fixed income where the only danger is inflation and rising interest rates, with dividend stocks there is also a fundamental economic risk.

Higher than market-average exposure to financials largely explained why high-yield stocks did not put up a good defense in 2008, but this overexposure receded with financials' collapse. This factor will inevitably recede, but not until commercial real estate defaults looming over regional banks are resolved.

For those in need of a refresher on yield arithmetic:

Dividend Yield % = Annual Dividend Payments / Stock Price

The numerator (dividend payments) varies slowly over time, and it is the denominator (stock price) which drives changes in the ratio. Dividend theory has a glorious past, including study by Benjamin Graham, the father of fundamental stock analysis, who often valued companies on the basis of their expected future dividend payments. When these are reduced or uncertain, valuations are sure to fall, he argued. He was right in 2009.

Dividends are well-populated with ETFs. Credit much of this to WisdomTree, which has made a specialty out of high-dividend stocks ETFs.

The following lists of ETFs are organized by category:

Size

  • WisdomTree Dividend Top 100 ETF (NYSEArca:DTN), annual fees: 0.38%
  • WisdomTree SmallCap Dividend ETF (NYSEArca:DES), annual fees: 0.38%
  • WisdomTree LargeCap Dividend ETF (NYSEArca:DLN), annual fees: 0.28%
  • WisdomTree MidCap Dividend ETF (NYSEArca:DON), annual fees: 0.38%

Fundamental

  • Invesco PowerShares Dividend Achievers ETF (AMEX:PFM), annual fees: 0.5%
  • Claymore/BBD High Income ETF (AMEX:LVL), annual fees: 0.6%
  • Invesco PowerShares High Yield Equity Dividend Achievers Portfolio ETF (AMEX:PEY), annual fees: 0.5%
  • WisdomTree DEFA High-Yielding Equity ETF (NYSEArca:DTH), annual fees: 0.58%

International

  • WisdomTree Emerging Markets High-Yielding Equity ETF (NYSEArca:DEM), annual fees: 0.63%
  • WisdomTree Emerging Markets SmallCap Dividend ETF (NYSEArca:DGS), annual fees: 0.63%
  • WisdomTree Europe Dividend ETF (NYSEArca:DEB), annual fees: 0.48%
  • WisdomTree Europe High-Yield Equity ETF (NYSEArca:DEW), annual fees: 0.58%
  • WisdomTree Europe SmallCap Dividend ETF (NYSEArca:DFE), annual fees: 0.58%
  • WisdomTree International Dividend Top 100 ETF (NYSEArca:DOO), annual fees: 0.58%
  • WisdomTree International LargeCap Dividend ETF (NYSEArca:DOL), annual fees: 0.48%
  • WisdomTree International MidCap Dividend ETF (NYSEArca:DIM), annual fees: 0.58%
  • WisdomTree International SmallCap Dividend ETF (NYSEArca:DLS), annual fees: 0.58%
  • WisdomTree Japan Dividend ETF (NYSEArca:DXJ), annual fees: 0.48%
  • WisdomTree Japan High-Yield Equity ETF (NYSEArca:DNL), annual fees: 0.58%
  • WisdomTree Japan SmallCap Dividend ETF (NYSEArca:DFJ), annual fees: 0.58%
  • WisdomTree Middle East Dividend ETF (AMEX:GULF), annual fees: 0.88%
  • WisdomTree Pacific ex-Japan Dividend ETF (NYSEArca:DND), annual fees: 0.48%
  • WisdomTree Pacific ex-Japan High-Yielding Dividend ETF (NYSEArca:DNH), annual fees: 0.58%
  • SPDR S&P International Dividend ETF (NYSEArca:DWX), annual fees: 0.45%
  • Claymore/AlphaShares China Small Cap ETF (AMEX:HAO), annual fees: 0.7%

Co-founder of indexfunds.com, author of two books on investing, and founder of ETFzone.com, Will has been writing on indexing issues for 8 years. He holds an MBA from the University of Texas at Austin.