Select Dividend: Flagship for Income

07/07/2014 9:00 am EST

Focus: STOCKS

Mark Salzinger

Editor and Publisher, The No-Load Fund Investor

With more than $13 billion in assets, this featured ETF is among the very largest dividend-oriented ETFs; we see two reasons for its popularity: its above-average dividend yield and its strong performance record, explains Mark Salzinger, editor of The Investor's ETF Report.

iShares Select Dividend (DVY) is the iShares family's flagship dividend offering. Its portfolio is built from stocks in the broad-market Dow Jones US Index, excluding REITs, whose dividends don't qualify for the dividend tax rate.

To be included, stocks must past a minimum liquidity threshold, have a per-share dividend that is higher than its five-year average per-share dividend and pay out less than 60% of earnings as dividends.

The liquidity requirement weeds out the very smallest stocks. The comparison of current dividends to a five-year average is intended to capture stocks that are profitable enough to have been able to increase their dividend payments over time.

And the maximum payout ratio limit should exclude firms that pay out so much of their earnings as dividends that they are unable to make investments, or grow, or maintaining their businesses.

The 100 highest-yielding stocks that pass the three screens are included in the portfolio, which is weighted by yield. The higher the yield, the greater the stock's weighting in the portfolio.

This gives DVY a strong yield (recently 3.5%) relative to the market (the S&P 500 (SPX) recently yielded 2.0%).

The ETF's performance over the three-year period ended April 30, 2014, topped that of the S&P 500 (15.8% annualized versus 13.7%). Like other dividend ETFs, DVY's volatility has been about 20% less than that of the broad market.

Its composition is unique among dividend ETFs. While about 80% of yield-weighted DHS is in large-cap equities, such stocks account for only about 45% of DVY. Fully 15% of DVY was recently invested in small-caps, with the remaining (nearly 40%) in midsize companies.

DVY also is concentrated in only a few sectors, including utilities (more than a third of assets), consumer stocks (20%), and industrials (14%). No other sector accounts for more than 9%.

So, when smaller companies and ‘defensive' sectors like utilities and consumer staples outperform, DVY can be expected to outperform—as in 2011, when DVY gained 11.8% versus 2.1% for the S&P 500.

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