One of the newer entries in the dividend growth camp is the WisdomTree U.S. Dividend Growth fund (DGRW), introduced in 2013. While its dividend yield is somewhat lower than others in the group and its 0.28% expense ratio a bit higher, WisdomTree’s long experience with dividend-focused investing is a plus. Because it puts greater emphasis on future dividend growth—rather than seeking a long history of dividend increases by a company—the fund has one of the larger weightings in information technology companies, which make up 22% of holdings. Many of these companies have only started to offer dividends in the last few years, but they have some of the strongest prospects for dividend growth.

Even though technology company stocks aren’t usually viewed as a dividend growth play, companies such as Apple have been leading the charge for dividend increases over the last few years. The First Trust NASDAQ Technology Index ETF (TDIV) sports a 2.6% yield, which is fairly generous for the group. Part of that yield comes from a 20% allocation to high-dividend telecommunications firms.

Dividend Yield
Todd Rosenbluth, director of ETF and mutual fund research at S&P Capital IQ, believes that ETFs with a large presence in higher-yielding sectors still appeal to some investors. “Historically, utilities and other stocks that pay above-average dividends tend to be less volatile than the market,” he says. “Investors continue to value those characteristics.”

Of course, if interest rates fall or stay about the same, higher-yielding ETFs could continue to command premium prices, as they have amid similar conditions in the past. And bargain hunters might find good picking grounds for tactical short-term trading or longer-term holdings during periods when utilities and other high-yielding sectors stumble.

Rosenbluth cites the iShares Core High Dividend ETF (HDV) as a standout in the high dividend crowd. It yields 3.2%. It’s spread among a fairly broad range of sectors, holding a 24% stake in consumer goods, a 19% stake in health care and a 12% stake in utilities. The ETF, which chooses stocks based on Morningstar’s “economic moat research,” targets high-quality companies with high and sustainable dividend yields. A Morningstar analysis of the ETF notes that while it has displayed low volatility and strong performance, the fund’s nearly 60% allocation to defensive sector stocks “is the highest of any domestic dividend ETF, which means HDV is likely to suffer more than competing funds as rates begin to rise again.”

Another giant in the high-yield dividend space, the iShares Select Dividend ETF (DVY), tracks an index of 100 U.S. stocks that, among other things, have paid dividends for five years. At 34% of the fund’s assets, utility companies are by far the dominant sector in the DVY portfolio. Trailing far behind are consumer goods at 15%, industrials at 14% and oil and gas at 9%. The dividend yield is almost a percentage point higher than the S&P 500. The average market capitalization of companies in the DVY fund is $15 billion, so the fund falls into Morningstar’s mid-cap value category. Because only 15% of its portfolio comes from the S&P 500, it tends to be less correlated to the overall market than most dividend ETFs.

Utilities as a whole have a low correlation to the S&P 500. The three largest pure-play utility bets are the Utilities Select SPDR fund (XLU), the Vanguard Utilities ETF (VPU) and the iShares U.S. Utilities fund (IDU). The trio, whose top 10 holdings are similar, boast yields ranging from 3.2% to 3.6%.

The ETN Route
Exchange-traded notes, unlike ETFs, track commodities or currencies indexes, but a few have crept into the dividend space. They are made up of unsecured debt obligations. They trade on exchanges like stocks. They are issued by banks such as Barclays, Deutsche Bank and UBS. And they are marketed under a variety of brand names.

UBS has elevated both income and volatility through several leveraged ETN products tied to the performance and yield of dividend-paying companies. The ETRACS Monthly Pay 2x Leveraged S&P Dividend ETN (SDYL) roughly doubles the positive or negative performance of the S&P High Dividend Aristocrats Index, and its variable monthly coupon is linked to two times the cash distributions of its constituents. The index, which follows companies that have both raised dividends consistently for at least the last 20 years and have high absolute dividend yields, straddles growth and high-yield territories.

Two other ETNs track indexes that fall squarely into the high-yield camp. One of them, the ETRACS Monthly Pay 2x Leveraged Dow Jones Select Dividend Index ETN (DVYL), tracks the Dow Jones U.S. Select Dividend Index and has a strong presence in utilities and other classic high-dividend payers. Another, issued by Deutsche Bank, the ELEMENTS Dow Jones High Yield Select 10 Total Return Index (DOD) follows the classic “Dogs of the Dow” strategy and, unlike the UBS offerings, is not leveraged. The index comprises the 10 highest-yielding stocks in the Dow Jones Industrial Average and is reconstituted each December. These stocks yield so much because their prices are depressed, so the ETN represents a deep value play.

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