Dividend Stock ETF Investing: Growth vs. Value

05/24/2011 0 comments

Dividends have been long considered to be an important metric to value a company. In essence, dividends are the cash payment out of earnings from a company. If a company has a mandate to reward its shareholders with part of its earnings, company management is more responsible for and conscious on their excessive earnings: give back to shareholders or plow them back for future growth. This puts a check on executives to curb their growth at any price or expand company bureaucracy for their own purposes. 

Dividend ETFs are favorable investing vehicles in retirement investing. This is especially important for retirees or baby boomers who are relying dividends as part of their income. These ETFs have been used to build lower risk and higher return asset allocation portfolios such asRetirement Income ETFs.  Please refer to this article for more details. 

Two popular strateggies are employed in dividend stock investing: dividend growth (or appreciation) vs. dividend weighted (or hogs). The former selects and weighs more heavily on stocks that have a record of increasing dividends over time. The latter basically weighs more heavily on stocks that have higher yields (with the exception of filtering out some lower grade stocks). If one views dividends are a stream of earnings that are actually materialized to be delivered to shareholders over time, the dividend growth approach is like growth at a reasonable price while dividend hogs is like value investing. 

These two strategies are used for most of dividend stock ETFs. The following is a list of some of these U.S. dividend stock ETFs: 

Vanguard Dividend Appreciation (VIG) Growth
Vanguard High Dividend Yield Indx (VYM) Hogs
First Trust Value Line Dividend Index (FVD) Growth
iShares Dow Jones Select Dividend Index (DVY) Hogs
PowerShares HighYield Dividend Achievers (PEY) Growth
SPDR S&P Dividend (SDY) Hogs

The dividend growth strategy puts more weight on high quality companies that have increased their dividends over time. The high dividends are not the primary focus. Companies that increase dividend payout over time in general should have better cash flow and higher confidence in their future earnings. They are also more shareholder friendly. Such strategy has been long adopted in investment communities. Some of the best investment newsletters such as Valueline and Investment Quality Trends have had model portfolios employing this approach for more than 30 years.

The high dividend (or so called 'dividend hog') strategy, on the other hand, might run into dangers of investing in companies that merely try to maintain high dividends to appeal to investors.

The following table & chart show the performance of the above ETFs: 

Portfolio Performance Comparison

Portfolio/Fund Name1Yr AR1Yr Sharpe3Yr AR3Yr Sharpe5Yr AR5Yr Sharpe
PEY 19% 105% -2% -9% -4% -18%
FVD 27% 147% 4% 18% 8% 29%
DVY 28% 208% 1% 3% 0% -3%
VIG 25% 143% 5% 18% 5% 16%
VYM 28% 152% 3% 6%



From the above, it is clear that dividend growth ETFs outperformed dividend hog ETFs. Part of the reason is that during the 2008-2009 financial crisis, high dividend financial companies such as banks and mortgage companies were severely damaged. 

Disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

Symbols: VIG, VYM, SDY, FVD, DVY, PEY

 



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