‘Aristocrat' Dividend ETF’s Novel Approach Working

September 09, 2016

Philip Van Doorn, an investing columnist for MarketWatch, started his piece this week with a great line: “Boards of directors that consistently reward investors with higher dividends don’t get enough praise.”

Why? Because, as his piece detailed, dividend “aristocrat” stocks—those that have increased their dividend payments for the past 25 years and are included in the S&P 500 Dividend Aristocrats Index—have delivered not only income but growth to investors. They also consistently deliver more in total returns than the S&P 500.

Different Dividend ETF Composition

For ETF investors, those stocks can be accessed in a single portfolio through the ProShares S&P 500 Dividend Aristocrats ETF (NOBL). The ETF is today the 11th-largest dividend ETF in the market, with $2.48 billion in total assets.

But NOBL, while a high-dividend play, isn’t exactly like some of the most popular ETFs in this segment, funds like the $16.3 billion iShares Select Dividend ETF (DVY)—the largest high-dividend ETF on the market today.

The crucial difference is in the stock selection process underlying each fund. Yes, both look for stocks that have a solid track record of increasing dividends, but a so-called traditional high-dividend ETF such as DVY also selects and weights securities based on highest dividends.

Portfolio Tilts

Specifically, in DVY’s case—which we are using as an example of a more traditional approach to high-dividend ETF investing—the fund looks for a five-year history of dividends.

The fund is also dividend-weighted, picking some 100 stocks based on dividend yield from a broad market-cap universe and weighting them based on dividends, from highest to lowest.

The methodology often translates into a portfolio that tilts toward equity sectors that are known for high dividends, such as utilities and financials. That leads to concentration not only at the sector level but at the security level, as the fund allocates most heavily to higher-yielding stocks.

The 10 biggest holdings represent more than 20% of the portfolio.

Equal-Weighted Option

By contrast, NOBL offers equal-weighted access to S&P 500 stocks that have increased their dividends for the past 25 consecutive years.

Here, the track record requirement is longer, and each security is assigned roughly the same weighting in the portfolio to increase diversification. What’s more, the fund doesn’t screen for highest-yielding stocks only, avoiding some of the traditional sector tilts seen in funds like DVY.

In fact, while today roughly 30% of DVY is tied to utilities, and 14% is linked to financials, NOBL’s biggest sector allocation is consumer staples, at about 26%. Utilities are the smallest sector weighting—under 2%.

What NOBL gives up for the sake of diversification is yield. DVY is all about finding the highest-dividend-paying stocks within the broad stock market. NOBL has a current 30-day yield of 2.06%, which compares to 3.19% for DVY.

But both these high-dividend ETFs have in common a track record of outperformance relative to the S&P 500. Consider the year-to-date chart below—DVY has delivered roughly double the returns of the SPDR S&P 500 (SPY), while NOBL has outperformed by some 5 percentage points: 

 

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