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S&P Capital IQ


01/13/17 04:04:49 PM

Dividends Grow Again

S&P 500 companies made $397 billion in cash dividend payments to shareholders in 2016, 5% more than in the previous year.

This is the seventh year in a row that companies have increased their dividend payments.

With investor expectations of possible changes in tax policy, including cash repatriation and reduced corporate rates, coupled with stability in commodity prices, another strong year for 2017 seems possible.

There are a variety of low-cost exchange-traded funds (ETFs) focused on dividend growers available to investors, though often what's inside each ETF may vary despite the similarity of names.

There were 372 dividend actions by the S&P 500 in 2016, with 344 increases and seven initiations, in contrast to just 19 decreases and two suspensions. Among the largest sectors of the S&P 500 index, positive actions were most common for consumer staple payers (all 36 constituents) and information technology payers (44 of 45). Meanwhile, nearly as many S&P 500 energy companies had negative actions (11) as had positive ones (12).

Yet, 2016 dividend payments offer just a snapshot, as many large-cap companies have a long history of returning an increasing amount of cash to shareholders. Indeed, a variety of ETFs offer exposure to these stocks, though their exposures are distinct due to their dividend growth criteria.

ProShares S&P 500 Dividend Aristocrats (NOBL 54 Overweight) focuses on S&P 500 constituents that have raised their dividend for at least 25 consecutive years. The ETF holds 50 stocks and the previously mentioned consumer staples sector is NOBL's heaviest weighting (25% of assets), aided by stakes in Kimberly-Clark (KMB 115 ) and Sysco (SYY 55 ). Meanwhile, information technology (2%) is significantly underrepresented relative to the S&P 500 index, as the sector lacks the same long-term record of dividends.

With a focus on S&P 1500 constituents with a 20-year record of dividends, SPDR S&P Dividend (SDY 86 Marketweight) has greater exposure to small- and mid-cap companies than NOBL. The 106 holdings include more industrials (16% of assets) than consumer staples (13%). At 4% of assets, information technology is also underrepresented. Mid-cap industrials holdings include A.O. Smith (AOS 49 ) and Nordson (NDSN 113 NR).

In contrast, Vanguard Dividend Appreciation Index ETF (VIG 86 Overweight) tracks a NASDAQ Dividend index of companies with a 10-plus year record of dividend increases. The ETF holds 186 stocks, including some mid-caps, but it has a higher weighted average market cap than SDY. While consumer staples (23%) and industrials (22%) are the two largest sectors, information technology exposure (12%) is relatively higher than for ETFs focused on longer historical dividend track records. Accenture (ACN 116 ) and Microsoft (MSFT 63 ) are two holdings.

Meanwhile, WisdomTree US Quality Dividend Growth Fund (DGRW 34 Overweight) tracks a proprietary index of 283 dividend-paying large-cap companies that are believed to have growth characteristics. Information technology (20%) is the largest sector for DGRW. Apple (AAPL 119 ), which first began paying dividends in 2012, is one of the ETF's top-10 holdings.

In the past year, SDY was the best performer of the quartet, rising 24%. The three other ETFs were up between 15% and 17%.

In 2016, dividend-paying stocks in the S&P 500 index rose on average 15.6%, double the 7.6% average for non-payers. As investors consider how to gain diversified equity income exposure for 2017, we encourage a look inside.

CFRA ranks approximately 950 equity ETFs based on a combination of holdings-based analysis, risks, and costs.

Todd Rosenbluth CFRA Director of ETF Research


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