Dividends Grow Amid Rising Rates

During the first nine months of 2018, there were 291 dividend increases by S&P 500 constituents, including 75 that occurred in the third quarter. Increases this year were widely spread across the now-11 GICS [Global Industry Classification Standard] sectors, a reminder that dividend ETFs can serve as a great vehicle for tapping into the equity income from large-caps.

In August 2018, S&P 500 industrial sector constituent Illinois Tool Works (etf.com/stock/ITW) raised its quarterly dividend to $1.00 per share, from a prior $0.78 per share.

In September, McDonald’s (etf.com/stock/MCD) raised its quarterly cash dividend to $1.16 per share, from the previous $1.01 per share payment. These increases were nothing new, as both stocks are members of the S&P 500 Dividend Aristocrats Index, which consists of companies that have raised dividends for 25 or more years.

In the third quarter of 2018, the average dividend increase was 17%, according to S&P Dow Jones Indices, up from 14% in the second quarter of 2018 and 11% a year earlier.

Dividend ETF Choices Abound

By the end of September, 81% of S&P 500 constituents paid a dividend, providing many choices for income-oriented investors. Meanwhile, the dividend-payers yield of 2.3% was above the 1.9% yield for the broader S&P 500 Index, though the yield for both remains below the 3.0%-plus yield for the 10-year Treasury bond following recent hikes by the Federal Reserve.

Not surprisingly, there are a variety of ETFs that track an S&P dividend index consisting primarily of S&P 500 companies; however, the security and exposure characteristics of each of the ETFs are distinctly different.

The ProShares S&P 500 Dividend Aristocrats ETF (NOBL) tracks the aforementioned index of S&P 500 companies with 25 years of consecutive dividend increases. There are 53 companies represented in the index, with consumer staples (25% of assets), industrials (20%) and health care (12%) companies comprising the largest weightings. In contrast, utilities (2%) is the smallest of the sectors represented, despite the sector’s 3.49% yield being the highest for the broader S&P 500 Index.

Multi-Cap Dividend ETF

The SPDR S&P Dividend ETF (SDY) is a larger ETF that differs from NOBL because it fishes from the multicap S&P 1500 Index and only requires 20 years of dividend increases. There are 111 holdings, including midcaps like Aqua America (WTR) that raised its quarterly dividend to $0.22 per share, from a prior $0.21 in July 2018. While consumer staples (16% of assets) and industrials (16%) are the largest sectors, the utilities sector at an 11% weighting, is the fourth largest. By comparison, health care makes up just 7% of the portfolio.

Another SPDR dividend ETF tied to an S&P index, the SPDR Portfolio S&P 500 High Dividend ETF (SPYD), is focused on yield rather than historic growth. The fund currently tracks an index of the 79 highest-yielding stocks in the S&P 500 Index. As such, real estate (24% of assets) and utilities (21%) are the two largest sectors, while the industrials sector is the second smallest, at just 3%. Holdings include AES and UDR.

Source: CFRA Research, 10/9/2018

Other Dividend Screeners

The Invesco S&P 500 High Dividend Low Volatility ETF (SPHD) takes the high-yielding stocks in the S&P 500 to a different level than SPYD, by holding just 50 stocks and incorporating a semiannual low-volatility filter. Utilities (20% of assets) and real estate (17%) were the two largest here as well, though the weightings are different. Meanwhile, consumer staples (16% vs. 9% for SPYD) and industrials (5%) stocks, such as Philip Morris International (etf.com/stock/PM), were more represented.

While SPHD adds a price performance screen, dividend peer Oppenheimer S&P Ultra Dividend Revenue ETF (RDIV) incorporates a more fundamental input. RDIV invests in the highest-dividend-yielding stocks in the S&P 900 (large- and midcaps) weighted by revenue. Energy (19% of assets) is the largest, aided by holdings of Exxon (etf.com/stock/XOM) and Chevron (etf.com/stock/CVX), followed by utilities (16%) and consumer discretionary (15%). Duke Energy and Target are examples of stocks in these sectors. Health care (7%) and industrials (6%) are underrepresented in this ETF relative to some other dividend alternatives.

Limiting Sector Exposure

If the variety of sector exposures is too much, then the ALPS Sector Dividend Dogs ETF (SDOG) might be of interest. Though this ETF does not track an S&P index, the S&P 500 is the starting point. The ETF holds the five-highest-yielding stocks in each of the GICS sectors, and is reconstituted based on data as of the end of November. Health care (11%), energy (11%) and utilities (11%) were among the nine sectors that had between 10-11% of recent assets, with Scana and Eli Lilly examples of the ETF holdings.

The above ETFs have established long-term records, but additional S&P 500 based dividend ETFs have come out in the past year.

The AAM S&P 500 High Dividend Value ETF (SPDV) and the Global X S&P 500 Quality Dividend ETF (QDIV) combine the dividend factor with another one. While SPDV is like SDOG in owning five stocks in the each of the sectors with a focus on free cash flow yield, the high return on equity and low financial leverage screening criteria has QDIV leaning more toward consumer discretionary (17% of assets) and less toward materials (4%).

CFRA rates these and many other U.S. dividend ETFs such as  the iShares Core High Dividend ETF (HDV) and the Vanguard Dividend Appreciation Index (VIG) that do not have a connection to the prominent S&P 500 Index. Our ratings approach is based on a combination of holdings-level analysis and fund-specific attributes focused primarily on costs and technical trends.

Though past performance is not a driver of our ratings, we think the wide performance range between S&P-oriented ETFs highlights the importance of looking inside. The approximately 9% performance gap year-to-date through Oct. 9 between the top performer, RDIV, and the bottom performer, SPHD, is sizable.

At the time of writing, neither the author nor his firm held any of the securities mentioned. Todd Rosenbluth is director of ETF and mutual fund research at CFRA, an independent research firm that acquired S&P Global Market Intelligence's equity and fund business in October 2016. He can be reached at [email protected]. Follow him on Twitter @ToddCFRA.