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Standard & Poor's


01/22/15 05:00:10 PM


With the yield on the 10-year Treasury under pressure due to concerns about the macroeconomic overseas, investors may be eager to find alternative forms of steady income. Fortunately, there are a lot of options for dividend-focused ETFs, many of which incur modest expense ratios.

Although dividend ETFs have been around since 2003, the universe continues to expand with a dozen providers offering at least one of them. Among the largest ETFs and oldest such ETFs is iShares Select Dividend (DVY 80 Marketweight) that launched in November 2003 and has more than $15 billion in assets. DVY seeks to track a Dow Jones index that screens by dividend growth and payout ratios, with the stocks selected based on yield. DVY has a hefty stake in the defensive utilities sector (36% of assets) and minimal exposure to information technology (2%). One such stock is Entergy (ETR 88 **). In 2014, DVY rose 14.9%, more than 100 basis points stronger than S&P 500 index and the ETF's beta is just 0.77. DVY sports an above-average 3.1% dividend yield.

DVY has a 0.39% expense ratio and earns favorable ranking inputs for its relatively high S&P Capital IQ Quality Rankings and relatively low S&P Capital IQ Qualitative Risk Assessments. However, a number of its largest holdings are considered overvalued by S&P Capital IQ.

As such, investors may be interested in one of the dividend ETFs that recently launched. iShares launched a new dividend ETF in June 2014 that presently has approximately $150 million in assets. iShares Core Dividend Growth (DGRO 26 Overweight) has a 0.12% expense ratio, lower than DVY's. However, the biggest difference stems from the stocks inside the Morningstar index it tracks that are selected based on sustainability of dividend growth. Information technology (14% of assets) stocks such as Microsoft (MSFT 46 ***) are among the most represented, while utilities (6%) have a much smaller weighting. Consumer staples (17%) stocks make up the biggest stake. In addition, the weighted average market capitalization for DGRO is $105 billion, higher than DVY's $36 billion.

DGRO's ranking is also supported by relatively high S&P Capital IQ Quality Rankings and relatively low S&P Capital IQ Qualitative Risk Assessments. However, more of its holdings are considered undervalued according to S&P Capital IQ than in DVY. DGRO's short history is not a concern to us since we do not rely on past performance in ranking ETFs.

Another relatively young dividend ETF, from WisdomTree, might appeal to those looking for small-cap exposure. WisdomTree US SmallCap Dividend Growth Fund (DGRS 28 Overweight) has a weighted average market capitalization of $1.6 billion. DGRS is quite small, with just $25 million in assets and trades with a wider bid/ask spread than DGRO and DVY. However, it offers a 2.1% dividend yield, higher than most small-cap ETFs and has relatively high exposure to cyclical sectors such as industrials (22% of assets) consumer discretionary (20%) and materials (11%), with minimal exposure to utilities (1.5%).

While S&P Capital IQ has analysis on a smaller percentage of DGRS's assets, most of the stocks seem fairly valued and have average S&P Capital IQ Quality Rankings. However, the ETF is trading with bullish technical patters. DGRS has a 0.38% net expense ratio.


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