Dividend Stock ETFs All Dropped, But Showing Defensive

02/24/2011 Share 0 comments

Investors got a wake up call this week after the President's day: for the past two days, S&P has dropped 2.6%. We reviewed dividend stock ETFs performance in the following three equity classes:

• U.S. Equity: U.S. dividend stock ETFs appeared resilient among the market correction. For the past one week, for example, Vanguard High Dividend Yield Index (VYM) had the least loss: -0.68%, compared with SPY's 2.11% loss. In general, all U.S. dividend stock ETFs (SDY, FVD, DVY, VIG) outperformed the S&P 500 benchmark (SPY), showing that in general, dividend ETFs are more defensive during market stress. 
• International Equity: similarly, Powershwares International Dividend Achievers (PID) lost only 0.69%, compared with MSCI's broadbase index EFA's 2.07% loss in the last 5 days.
• Emerging Market Equity: WisdomTree's Emerging Market Income (DEM) lost 1.57%, compared with broadbase index EEM's 2.18% loss.

Preferred stocks showed the least loss (-0.48%) among all the dividend ETFs we monitored. For more detailed performance, please refer to here.

The following table shows the trend scores for dividend ETFs. U.S. REITs (IYR), U.S. stocks (SPY) and U.S. dividend stocks (VYM, VIG) are retaining the top spots. Emerging market equity (EEM) and preferred stocks (PFF) are still at the bottom.

The trend score is defined as the average of 1,4,13,26 and 52 week total returns (including dividend reinvested).

We would like to point out that more U.S. companies are expected increase their dividend payout in 2011. In a recent report by CNBC, Senior analyst Howard Silverblatt in S&P indices stated "We estimate that over half the S&P 500 issues will pay out more in regular cash payments in 2011 than they paid in 2010," Given the current anemic economic recovery, positioning the U.S. equity portion of one's portfolio in dividend stock ETFs is a good strategy with certain defensive nature.

In fact, in the last one year, investing in dividend ETFs has slightly outperformed a strategy that invests in broadbase indices. The following table shows the performance comparison between an income focused portfolio and a general market index focused portfolio, both using a tactical asset allocation strategy.

Barring from a severe debt induced financial event in global markets, we view investors should pay more attention to dividend ETFs in the coming years for defensive and growth purposes.

Symbols:RWX,SPY,IYR,VIG,IDV,VYM,EEM,PID,EFA,FVD,DVY,PEY,SDY,PFF,

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.

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