2012 was not a great year for the dividend ETFs as many investors
avoided them in the last quarter of the year due to risk of a huge
increase in taxes. Fortunately, the agreement on dividend taxes was
more favorable than expected and thus the dividend ETFs should
regain their appeal and popularity this year.
Dividend taxes for top-bracket taxpayers will rise from 15% to
20% (plus an additional 3.8% surcharge for Obamacare) while the
taxes for those in the lower tax brackets would remain at the
current levels. (Read: Three Great ETFs to Buy This Earnings
Season)
Per S&P Dow Jones, companies in the S&P 500 index paid
out regular cash dividends of $281 billion in 2012--17% higher than
2011 and 13% more than the previous record in 2008—without counting
all the dividends that companies might have paid in January but
paid in 2012 in order to avoid higher taxes in 2013. S&P
expects 2013 to be another record year for dividend payments, after
the cliff resolution.
Most large US corporations are sitting on large cash piles and
are in a position to increase payouts to the shareholders. Further,
there would be no difference between tax rates on long-term capital
gains and dividends. In case the dividend taxes had increased more
than the taxes on capital gains, many companies would have
increased share buybacks and reduced dividend payouts. (Read: Best
ETF Strategies for 2013)
Also, dividend stocks and ETFs are much better options for
yield-hungry investors in this environment of ultra-low rates. Many
investors continued to seek refuge in so called “safe-haven” assets
last year as the markets stayed volatile due to uncertain situation
in Europe, slowing growth in the emerging markets and fiscal cliff
in the US. Further as the Fed continued its massive asset
purchases, Treasury yields plunged to new lows.
However the situation is likely to change this year. Federal
Reserve may slow-down or end its bond purchases in 2013 and the
interest rates may start going up. At current yield levels the
losses will be very high when the rates go up and thus it would be
best for the individual investors to stay away from Treasury bonds
now. (Read: Time to Exit Treasury Bond ETFs)
At the same time, since most dividend paying companies are
stable, mature companies, these investments also provide greater
stability and safety in a volatile environment—and the markets are
expected to experience higher volatility if the debt ceiling
negotiations turn ugly or if the Euro-zone situation worsens.
We prefer the ETFs that invest in stable, cash rich, low-risk
companies that have solid growth potential, compared with the ETFs
that focus just on the yield. Below we present four such ETFs that
provide a stable stream of income to the investors and provide
stability to the portfolio. (Read: Which Volatility Hedged ETF
should you consider?)
Vanguard Dividend Appreciation ETF (VIG)
VIG follows the Dividend Achievers Select Index, which is
composed of common stocks of high quality companies that have a
record of increasing dividends for at least 10 years. Launched in
April 2006, the fund is now the largest dividend ETF, with $12.7
billion in AUM.
The fund is currently home to 133 securities, with a median
market cap of about $40 billion. Wal-Mart, Coke and P&G are top
three holdings while the top ten largest holdings account for 37.5%
of the assets. The ETF is heavily weighted towards Consumer
Discretionary (15%), Consumer Staples (24%) and Energy (10%)
sectors.
With an expense ratio of 0.13%, this is one of the cheapest
funds in this space. The dividend yield at 2.26% is just slightly
above average S&P dividend yield, but this fund is better
suited for investors who seek long-term capital appreciation along
with income and not just high current yield. The fund has a beta of
0.82 vs. S&P 500.
SPDR S&P Dividend ETF (SDY)
Launched in November 2005, this fund is based on the S&P
High Yield Dividend Aristocrats Index which is designed to track
the performance of highest dividend yielding companies within
S&P Composite 1500 Index companies which have been consistently
increasing their dividends every year for at least 20 years.
In terms of sector exposure, the fund focuses on Consumer
staples (21%), Industrials (16%) and Financials (15%). The fund
holds 83 securities and is very well diversified with the top
holding accounting for just 2.9% of total assets.
With an expense ratio of 35 basis points, this fund is more
expensive than VIG but has an attractive yield of 3.13% currently.
PowerShares S&P 500 High Dividend Portfolio
(SPHD)
SPHD intends to combine two most desirable investment
themes—high dividend and low volatility, which almost guarantees
the long-term success of this ETF. The index is composed of 50
stocks that historically have provided high dividend yields and
exhibited low volatility.
The ETF is heavily weighted towards Consumer Staples (17%),
Financials (14%) and Telecom (10%) sectors.
Launched in October last year, the fund has attracted more than
$41 million in assets so far. It charges an expense ratio of 30
basis points and currently has an excellent distribution yield of
4.27%.
EGShares Low Volatility EM Dividend ETF
(HILO)
HILO is an ideal option for investors seeking to benefit from
high dividend yield and high growth potential of the emerging
market companies while trying to avoid excess volatility associated
with some such companies.
HILO tracks INDXX Emerging Market High Income Low Beta Index,
designed to provide high income and to be significantly less
volatile through the utilization of low beta stocks. The index has
a beta of 0.94 vs. MSCI EAFE Index. Further, the Index limits
concentration in any position to 5% and country exposure to a
maximum of 5 positions.
South Africa (21.4%), Turkey (16.1%) and India (11.4%) occupy
the top spots in terms of country exposure. The fund holds 30
securities with an average market cap of about $14 billion. The ETF
is tilted towards Financials (21%), Consumer Goods (18%) and
Telecom (17%) sectors. The fund has an expense ratio of 85 basis
points and yields 4.96% currently.
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EGS-LO VT EM DV (HILO): ETF Research Reports
EGS-LO VT EM DV (HILO): ETF Research Reports
SPDR-SP DIV ETF (SDY): ETF Research Reports
SPDR-SP DIV ETF (SDY): ETF Research Reports
PWRSH-SP5 HI DV (SPHD): ETF Research Reports
PWRSH-SP5 HI DV (SPHD): ETF Research Reports
VANGD-DIV APPRC (VIG): ETF Research Reports
VANGD-DIV APPRC (VIG): ETF Research Reports
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