dividend ETFs?

[Ed_The_Gypsy]

It is time to ask the group. This is excerpted from another thread.

I have recently become more interested in dividend investing. Which is another way to say that the collapse of my protfolio has moved me to review what I have been doing. I am considering replacing part of my index funds with one or more dividend ETFs.

I only recently found the Dividend Growth Investor weblog site, where several ETFs were mentioned--PFM, SDY, PID, DVY and PEY, among others. I then found Vanguard's VIG (9.15% financials & 9.03% energy) and did a little investigating.

I like the components of VIG, but the yield is a little low (3.42%).

PEY is 2/3 financials and I don't like that at all. A non-starter.

DVY also is high in financials. I had eliminated DVY from consideration before I read Running_Man's comments in another thread and realized I needed to learn more about these ETFs before I consider buying any--hence this thread.

PFM and SPY have similar performance. I like PFM's larger energy content (10.8% vs 1.3%) and lower financials content (17.9% vs. 22.4%) and I like their 10 largest holdings a lilttle more than SDY, but SDY has the methodology--the S&P High Yield Dividend Acheivers--and a better yield (6.27% vs. 3.57%). On the surface of it, I favor SPY.

PID is International Dividend Acheivers, which are difficult for me to evaluate. It has a high financials content (34.6%), but good energy content (6.7%) and a nice yield (7.93%), although it is suspiciously high.

So, PFM, SDY, PID and VIG look interesting to me. I have my own ideas about energy stocks these days, so being light on energy does not bother me.

The financials content seems to be associated with higher yields. I am a lot more comfortable with Canadian banks and financial institutions than I am with any in the US at this time. So, I don't think that all financial institutions are bad--but I could be wrong.

I am not quite ready to go the individual stock route beyond a couple of energy stocks and BRK-B (which may have been a poorly timed purchase). These ETFs look like a reasonable way to start out.

Comments, please! I have been trying to educate myself on dividend ETFs, but there are a lot of gotchas! I weant to avoid doing something stupid.

Thanks,

Ed

 

[LOL!]

My personal take is that there is no safety in dividend paying stocks and thus no safety in dividend paying ETFs. The dividend rates are gonna collapse. One cannot look at the yield of any stock, REIT, or ETF in order to judge it.

If you want dividends, stick to fixed income such as CDs, GNMAs, Treasuries and very short term investment grade bonds. If you need more income to pay your expenses, you should probably just cut your expenses.

 

[MichaelB]

VIG (vdaix, Vanguard dividend appreciation index fund) isn't a dividend fund, it's a dividend growth fund. That is, they are not looking for high yielding equities but those that they project to have a high rate of future dividend growth. Vanguard uses a modified version of the Dividend Achievers Index.

Vanguard also has an active fund in this area - Vanguard Dividend Growth fund (vdigx). The objective is similar - capital growth and income.

I like the idea of dividend investments but am very cautious right now. As the credit contraction works its way through the economy it must eventually impact dividend payments, affecting most severely marginal businesses or companies that use cheap and easy credit to bolster their dividends (instead of strong cash flows).

Powershares and WisdomTree etfs - which are focused on high dividend payers, still have lots of room to suffer as more non-financials pull back. We probably need the rest of this year to separate the wheat from the chaff. For now I'll stay with the dividend growth strategy of the 2 vanguard funds.

Michael

 

[ziggy29]

I like dividend investing and I like index investing, but dividend index investing is terrible. Way too much junk in there that's distressed and about to melt down, which is why their dividend yields are so high.

 

[RonBoyd]

WisdomTree To Create Nonfinancial Dividend ETFs

Beginning in late April, the WisdomTree Dividend Top 100 (NYSE Arca: DTN) will be renamed the WisdomTree Dividend ex-Financials Fund; its international counterpart, the WisdomTree International Dividend Top 100 (NYSE Arca: DOO), will be renamed the WisdomTree International Dividend Ex-Financials Fund.

The funds will become the first dividend-focused ETFs to exclude Financials.

 

[HFWR]

Maybe it would be better to focus on traditional dividend sectors, like utilities, energy, and consumer staples. At least you could eliminate [-]most[/-] some of the exposure to financials.

 

[2B]

WisdomTree To Create Nonfinancial Dividend ETFs

That's a good sign that financials should be bottoming..... or not.

The divident of almost any broad market ETF shows a very high dividend yield. I don't think they will necessarily maintain the 2008 payout levels. The wheels have definitely fallen off the wagon.

 

[Ed_The_Gypsy]

Let's step back a minute. Unless I missed something, all of the ETFs in my sights are dividend growth ETFs containing stocks that have increased their dividends over a period of time, typically 10 years. The Dividend Growth Investor blog also adds a personal requirement that no more than half of the company's earnings be paid out as dividends. It seems stocks in or out of ETFs that meet these criteria would be better choices than a broad index fund in that they are excluding poorly-run companies. An additional screen could be applied to choose those ETFs that have reduced financials content.

Remember, I am just trying to improve on the alternative of sticking with index funds. The other choice is to buy individual stocks that meet these criteria and I don't have the time to follow individual stocks these days.

 

[LOL!]

Remember, I am just trying to improve on the alternative of sticking with index funds. The other choice is to buy individual stocks that meet these criteria and I don't have the time to follow individual stocks these days.

Studies show that what you are trying to do doesn't work. The dogs that you want to avoid are exactly the equities that sometimes come roaring back. By using the index fund approach you are sure to buy some of the dogs at a low price. It's easier to stomach buying the dogs when they are hidden away in index funds. Rebalancing will help you sell the high flyers before they drop.

You can overweight to the value side of things with an index fund that claims to be value tilted. For example, VTV and VBR or the many DFA offerings. Value-tilt does not mean high-dividend tilt.

 

[LOL!]

Or perhaps another approach is to buy the index funds, then separately sell short those dogs that you have identified? There are so-called long-short funds that already do this for you. Check out their track records.

 

[ziggy29]

Or perhaps another approach is to buy the index funds, then separately sell short those dogs that you have identified? There are so-called long-short funds that already do this for you. Check out their track records.

I know of people who have done that, wanting to buy into dividend ETFs without the financials. They would buy something like DVY and then go short an approriate amount of something like XLF to cancel out the impact of the financials in DVY. Not sure how it's worked out.

Still, as is often the case, I wonder if that will stop working if it becomes mainstream and they start crafting dividend indices ex-financials...

 

[haha]

Let's step back a minute. Unless I missed something, all of the ETFs in my sights are dividend growth ETFs containing stocks that have increased their dividends over a period of time, typically 10 years.

The problem with any dividend ETF or mutual fund is that the sponsors will have trouble selling it without a high yield. Also, they will have more or less mechanical and backward looking rules to guide their investing.

Right now, another problem is that when they finally purge themselves of financials, financials will spring back hard.

It doesn't take long to pick 10 or so quality companies with reasonable dividends, a history of dividend growth and business and financial characteristics that would tend to give some stability to that dividend process.

Ha

 

[ziggy29]

Right now, another problem is that when they finally purge themselves of financials, financials will spring back hard.

It doesn't take long to pick 10 or so quality companies with reasonable dividends, a history of dividend growth and business and financial characteristeics that would tend to give some stability to that dividend process.

Yes, I agree. Such a basket would likely be overweight consumer staples and perhaps utilities, but at least those sectors are less prone to implosion than most.

As for the question about excluding financials, what you write reminds me of a Morningstar study a few years back which showed that if you invested the top-rated mutual funds in the previous year's worst sector and held for three years, the results were rather impressive. (Something like that, anyway; I don't remember the specific dynamics. But it points out that usually, the best time to establish a position in a sector is when everyone hates it. Not sure if that works here because the problems with the financials now are more systemic than cyclical.)

 

[Ed_The_Gypsy]

Ha, it sounds like what you and ziggy are saying is, do the research and buy ten stocks that meet the criteria of my choice. I could exclude obvious stinkers that way. Did I get that right?

Zig, if it doesn't pay a dividend, I don't want it. They may come roaring back. Let someone else enjoy that ride. I am sick of growth companies that do not pay dividends. The story is that the more earnings that are retained, the worse those earnings are managed.

I am basically looking for an income stream with growth potential. It seems to be available at a reasonable price at the moment. All I am trying to do is improve on my index funds--if possible.

LOL, I am trying to stay simple. I know nada about shorting and don't want to try. I ain't Jim Rogers.

I appreciate all comments. Enlightenment may come yet.

Thanks,

Ed

 

[Running_Man]

Ed,
I don't think you are of the mindset to be an individual stock owner so I would not advise you to go that route, despite the fact that is what I prefer. But I could listen to investor calls with management all day long and never get bored myself. Gotta love the internet.

After reviewing some of your question marks, they all have issues. However, overall for what you are looking to do I think PFM, powershares dividend achievers is the best choice : In general you can see in down years for the S&P this index outperforms by about 7 percent (2008,2002,2001).

http://www.invescopowershares.com/pdf/P-PFM-PC-1.pdf

As you can see from their top holdings, many stocks that I would have winnowed out long ago as likely dividend cuts coming into the year made the list: GE, Citicorp, Pfizer, Bank of America, however at this point most of those stocks have been pummelled so much that they can't hurt your performance in this fund too much especially versus the indexes. You will hold all of those from what I understand to the end of the year allowing some chance for a recoup on those, especially if that is the part of the S&P500 that really jumps. Then whichever stocks replace those next year should be solid companies to come through the last 2 years unscathed. The index is weighted towards consumer staples at 20% but nothing like the 50% financials DVY held at one time.

 

[Ed_The_Gypsy]

Thanks again, R_M.

As you note, I am not of a mind to deal with individual stocks at the moment, but I could be persuaded by a good argument.

I am still mulling this over.

Still accepting input.

Cheers,

Ed

 

[pinetree64]

Good advise so far. I looked at dividend and high yielding sector ETFs a few weeks ago and decided to buy CD's instead. Too much to go wrong in the market right now. CDs are running 2.5% - 3.5% (2yrs - 4yrs). I'm sticking with 3yrs or less. I have great fear of inflation.

I don't do individual stocks but a few may be worth checking out VZ (I work for), AT, JNJ... don't go yield chasing.

 

[Ed_The_Gypsy]

My stars and little comets!!!!

I think I am getting an education here. Please tell me if I got this right.

I think I just learned about "ask" and "bid". You buy at the "ask" price; you sell at the "bid" price.

SDY is a portfolio of 50 stocks. Bid today is $28.50/share; ask is $38.42/share--a 35% spread! NAV is = $30.42. (It becomes clearer why day-trading is a hard way to make a living.)

For comparison, dividend stocks in such ETFs are:
GE is today $7.04 bid/$8.25 ask = 17% spread,
PPG = $29.65 bid/$32.50 ask = 9.6% spread.
PM = $25.00/$33.00 = 32% spread.
MO = $15.00/$15.33 = 2.2% spread.

If I were to buy 520 shares of SDY, it would cost me 520 x $38.42 = $19,978 plus $20 for the trade. (Vanguard charges me $20/trade.) The spread would have cost me about 520 x ($38.42-$28.50) = $5,158. Total 'cost' above bid = $5,178.

If I were to buy all 50 stocks in SDY instead of the ETF, it would cost me 50 x $20 = $1,000 for the total trade. Assuming that
1) the average cost of all the stocks in SDY is about the same as the the NAV = $30.42, and
2) the NAV is about the same as the bid, and
3) an average spread of about 15% for the four stocks above to be typical, then
the spread would cost me about 520 x NAV(=$30.42) x 15% = $2,372. Total 'cost' above bid = $1,000 + $2,372 = $3,372, which is $1,806 less than $5,178.

Superficially then, it looks as if I would be paying very roughly about 10% more for the privilege of buying the SDY ETF relative to the underlying stocks. I could weed out the known losers (e.g., GE) if I bought the underlying stocks, too.

Do I understand all this correctly?

Thanks.

Ed

 

[haha]

For comparison, dividend stocks in such ETFs are:
GE is today $7.04 bid/$8.25 ask = 17% spread,
PPG = $29.65 bid/$32.50 ask = 9.6% spread.
PM = $25.00/$33.00 = 32% spread.
MO = $15.00/$15.33 = 2.2% spread.

Ed,

I think you may have received these quotes after the market closed. These are really not realistic quotes. During the trading day, stocks such as those you mention normally trade at spreads of only 1 cent. Look during the day, and make you comparisons. During very fast markets they may widen out a cent or two more at worst. Unless a bomb gets dropped in Manhattan.

Ha

 

[Ed_The_Gypsy]

Thanks, Ha. Yes, I did this just a few minutes ago, after everything closed.

Would the same apply to ETFs? If not, it strengthens the argument for individual stocks vs. ETFs. [I suppose I could answer this myself, tomorrow, when the markets are open.]

Much obliged.

 

[haha]

Thanks, Ha. Yes, I did this just a few minutes ago, after everything closed.

Would the same apply to ETFs? If not, it strengthens the argument for individual stocks vs. ETFs. [I suppose I could answer this myself, tomorrow, when the markets are open.]

Much obliged.

The same will apply, though depending on how actively the ETF trades the spreads may not be as narrow as GE or MO. It usually will not a be a big deal if you are buying for a long term hold.

Ha

 

[Ed_The_Gypsy]

It usually will not a be a big deal if you are buying for a long term hold.

Those are my feelings, too. Again, I see day-trading as a trap. The spreads did amaze me, though.

 

[haha]

Those are my feelings, too. Again, I see day-trading as a trap. The spreads did amaze me, though.

Maybe I should repeat- these are not the spreads. They are imaginary.

Once you look during the day, you wili be amazed at how tight the spreads are on these active issues.

 

[Ed_The_Gypsy]

Ha,

I just looked, now that the markets are open. Ask and bid on SDY are now $29.86 and $28.71; only a 4% 'spread' (or whatever the correct term is).

(Even so, nobody talk to me about day-trading!)

My education continues. Thanks for your help.

Cheers,

Ed in Cowtown, watching the snow come down--again.

 

[haha]

Ha,

I just looked, now that the markets are open. Ask and bid on SDY are now $29.86 and $28.71; only a 4% 'spread' (or whatever the correct term is).

I would skip that. It must be a very low volume issue; that spread stinks.

Ha