The Dividend Dance (Tom Bradley)

Tuesday, May 7th, 2013

By Tom Bradley, Steadyhand Investment Funds

In Saturday’s Report on Business, there was a remarkable table embedded in Rob Carrick’s article (How to Shelter Your Portfolio From a Housing Decline). It showed the top 10 Canadian equity funds (by assets) and the top 10 Canadian dividend income funds.

What struck me was the puny size of the biggest Canadian equity funds. Outside of the iShares S&P/TSX 60 Index Fund ($11.5 billion), which is an ETF that’s used mostly by institutional investors, the next largest fund was RBC’s Canadian Equity Fund at $2.3 billion. The 10th largest fund was under a billion dollars.

The list of dividend funds, on the other hand, was considerably deeper and shows where Canadian mutual fund investors have focused their portfolios. The largest fund was again RBC’s (RBC Dividend – $10 bln), followed by TD Dividend Growth ($5.5 bln), Scotia Canadian Dividend ($3.5 bln), BMO Dividend ($3.3) and Sentry Canadian Income ($2.5 bln).

I recognize that conventional mutual funds are in decline, but the lists confirm a point we’ve been making over the last year – with the steady shift to stable, income-oriented stocks, Canadian portfolios have become less diversified. For example, the dividend income funds in the table are heavily tilted toward financial services stocks and own few resource, technology and industrial stocks.

With the solid past performance of income-oriented stocks, it’s easy for investors to lose track of where their portfolios have crept. I say that because I firmly believe a portfolio narrowly focused on Canadian banks, pipelines and REITs will significantly underperform a well-rounded one that includes small, medium and large companies in a range of industries and geographies.

Tags: Canadian, Dividend Funds, Equity Funds
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US Utilities: Don’t Overpay for Yield

Wednesday, July 25th, 2012

by Russ Koesterich, Chief Investment Strategist, iShares

As short-term interest rates remain at or close to zero, investors starved for income should be wary of overpaying for yield, particularly when it comes to US utilities.

As I write in my new Investment Directions monthly commentary, I continue to prefer dividend funds and the global telecommunications sector for investors searching for yield. But some segments of the market – such as US utilities — are looking expensive and should likely be avoided.

I continue to hold an underweight view of US utilities for two reasons:

1.) Valuation: Investors have pushed US utility stocks up too far as US utilities currently look even more expensive than they were back in January. US Utilities are currently trading at nearly 15x earnings, versus an average since 1995 of around 14.5x. And the stocks are even more expensive when you compare their valuation to the broader market. As a regulated industry, utilities typically trade at a discount to the broader market. Since 1995, US utilities have traded at an average discount of roughly 25% to the S&P 500. Today, however, US utilities are currently trading at a more than 8% premium, the largest since late 2007.

2.) Profitability: The premium can’t be justified by US utilities being more profitable than in the past. In fact, the US utilities industry is currently less profitable than its long-term average. Return on earnings for US large cap utility companies is currently 10.5%, the lowest level since 2004.

So why are investors paying a near 10% premium to invest in a sector whose profitability is close to an eight-year low? The answer: US utilities have benefited from investors’ flight to safety and flight to yield. To be sure, if the market experiences a major correction, US utilities would likely outperform given their low beta (a measure of the tendency of securities to move with the market at large). However, absent a major correction, I believe a combination of stretched valuations and lackluster profitability suggests that US utilities are likely to continue to trail the market, even in a slow growth environment.

As I wrote in a recent post, my preferred vehicles for seeking yield are dividend paying equities, such as the iShares High Dividend Equity Fund (NYSEARCA: HDV), given its low beta and quality screen; the iShares Dow Jones International Select Dividend Index Fund (NYSEARCA: IDV) and the iShares Emerging Markets Dividend Index Fund (NYSEARCA: DVYE). For investors willing to take the added risk of sector exposure, I like the iShares S&P Global Telecommunications Sector Index Fund (NYSEARCA: IXP).

And for investors still looking for exposure to utilities, I continue to hold a neutral view of global utilities, particularly international ones available through the iShares S&P Global Utilities Index Fund (NYSEARCA: JXI).

Source: Bloomberg

Russ Koesterich, CFA is the iShares Global Chief Investment Strategist and a regular contributor to the iShares Blog.  You can find more of his posts here.

The author is long HDV, IXP, IDV

Investing involves risk, including possible loss of principal. In addition to the normal risks associated with investing, narrowly focused investments typically exhibit higher volatility.  International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.

There is no guarantee that dividends will be paid.

Tags: Amp, Beta, Cap, Chief Investment Strategist, Dividend Funds, Earnings, Global Telecommunications Sector, interest rates, Investment Directions, Investors, Ishares, Nbsp, Profitability, Russ, Segments, Tendency, Term Interest, Utilities Industry, Utility Stocks
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Going Defensive With Dividend Funds

Tuesday, May 29th, 2012

While market volatility now looks closer to fair value than it did in early May, I still believe that investors should remain defensive. Stocks remain very much exposed to a potential disorderly Greek exit (“Grexit”) from the euro and any accompanying contagion.

One defensive play I particularly like: dividend paying stock funds, including those consisting of equities in traditionally volatile emerging markets.

As I write in my new Market Update piece, dividend stocks generally have been less volatile than the broader market, which can make them a good defensive choice.

Since 1992, the beta (a measure of the tendency of securities to move with the market at large) of the Dow Jones Select Dividend Index to the S&P 500 has been around 0.8. That means that for every 1% the market moves this index typically moves around 80 basis points (see how I calculated the beta in the chart below).

In the case of the Morningstar Dividend Yield Focus Index, the beta has historically been even lower, at around 0.7.

This historical pattern has continued during the most recent downturn. As of Thursday’s market close, the S&P 500 was off approximately 6% from its May peak, while the Dow Jones Select Dividend Index and the Morningstar Dividend Yield Focus Index were down 3% and 2% respectively.

Even in emerging markets, typically a more volatile sector of the market, dividend stocks tend to cushion the downside. For instance, the Dow Jones Emerging Markets Select Dividend Index has a beta of roughly 0.80 to the broader MSCI Emerging Market Index.

Given the ongoing uncertainty surrounding Greece and the overall European Union, near-term market volatility is likely to remain high and I continue to advocate that investors have a high allocation to high dividend equity funds. In particular, I like the iShares High Dividend Equity Fund (NYSEARCA: HDV), given its low beta and quality screen, and the iShares Emerging Markets Dividend Index Fund (NYSEARCA: DVYE). Another potential solution focusing on US equities is the iShares Dow Jones Select Dividend Index Fund (NYSEARCA: DVY).

Russ Koesterich, CFA is the iShares Global Chief Investment Strategist and a regular contributor to the iShares Blog.  You can find more of his posts here.

Source: Bloomberg

The author is long HDV

Tags: Defensive Stocks, Dividend Funds, Dividend Paying Stock, Dividend Stocks, Dividend Yield, Dow Jones, Equity Fund, Equity Funds, ETF, ETFs, Focus Index, High Dividend, Index Fund, Ishares, Market Volatility, Morningstar, Msci Emerging Market, Msci Emerging Market Index, Quality Screen, S Market, Stock Funds, Volatile Sector
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Under the Hood: A Deeper Dive into Dividend ETFs (Archand)

Friday, November 11th, 2011

by Noel Archand, iShares

In a recent post I wrote about ETFs and their names. I explained that while a name can give investors an initial hint as to what type of exposure an ETF offers, it’s worth “looking under the hood” to see what a fund holds before deciding to add it to your portfolio.

This post is the first in our new “Under the Hood” series, which is intended to explain similarities and differences among the ETFs that we offer and help you make more informed investment decisions.

Today, I’ll concentrate on two of our dividend funds – the iShares High Dividend Equity Fund (HDV) and the iShares Dow Jones Select Dividend Index Fund (DVY).

Dividend investing has played a significant role in portfolio construction for decades, with dividend yielding stocks providing investors the opportunity to profit from price appreciation and dividend income. But with government bond yields at historic lows and interest rates expected to stay low for quite some time, dividend ETFs are garnering a fresh look from investors.

Dividend ETFs offer investors efficient, diversified exposure to dividend stocks, which can be difficult and time-consuming to pick individually.

HDV and DVY both offer investors exposure to dividend investing. But HDV’s top five holdings as of November 2 were AT&T, Pfizer, Johnson & Johnson, Procter & Gamble, and Verizon, while DVY’s top five holdings as of that date were Lorillard, VF Corp, Chevron, Entergy and Kimberly-Clark.

Why do their holdings vary so greatly? To begin with, the funds track different indices that use different screening processes.

HDV, which launched in March of this year, tracks the Morningstar Dividend Yield Index. It’s concentrated in mega- and large-cap companies that have been screened using both Morningstar’s Economic Moat and Distance to Default measures.

Economic moat, a phrase coined by the Oracle of Omaha — Warren Buffett – refers to a company’s ability to maintain its competitive advantage versus its peers and rivals. Morningstar uses it to measures the sustainability of a company’s future profits, while it uses distance to default to measures a company’s probability of default.

DVY, which was launched in 2003, tracks the Dow Jones US Select Dividend Index. It includes stocks of varying market caps, but stocks must have 5 years of non-negative dividend growth in order to be included.

HDV can be thought of as offering a forward looking methodology, while DVY offers more of a backward looking methodology (remember that 5-year historical hurdle companies must overcome). So HDV can hold a company like Philip Morris, which was spun off from Altria in 2008, while DVY cannot.

Also, DVY does not limit the sector weights of its holdings. So as of November 2, utilities accounted for 35.17% of its holdings, while consumer goods accounted for 21.11% and industrials accounted for 12.96%.

But sectors weights are limited in HDV because the distance-to-default screen excludes companies in the bottom 50% of their sectors. As of November 2, health care accounted for 26.72% of the fund, while consumer goods accounted for 22.3% and utilities accounted for 17.72%.

If you are following Russ’ market commentary and want exposure to the energy sector through utilities, DVY could be a possible addition to your portfolio. If you prefer defensive equity exposure through health care in these uncertain times, HDV could be a more appropriate investment.

Both ETFs offer exposure to the consumer sector. If you believe consumers will continue to spend on tobacco (think Lorillard ), clothes (think VF Corp’s Wrangler jeans and Timberland boots), Kleenex (think Kimberly-Clark) and fast food (think McDonald’s), then DVY offers exposure to that type of consumer spending.

HDV’s consumer goods slant is slightly different, offering exposure to that sector through cell phones (AT&T and Verizon), Crest toothpaste and Tide detergent (Procter & Gamble) and tobacco (Philip Morris).

As I mentioned in my earlier post, a name may be an initial hint as to what type of exposure an ETF offers, but there’s always more to the story. HDV and DVY both offer dividend exposure but provide it in different ways.  It’s worth taking the time to look under the hood to determine which fund best suits your dividend needs.

Diversification may not protect against market risk. Narrowly focused investments typically exhibit higher volatility. There is no guarantee that dividends will be paid.

Holdings are subject to change. There is no guarantee or implication that any specific companies will remain in any fund.

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Tags: Archand, Cap Companies, Diversified Exposure, Dividend Etfs, Dividend Funds, Dividend Income, Dividend Stocks, Dividend Yield, Dividend Yielding Stocks, Dvy, Economic Moat, High Dividend, Ishares, Lorillard, Oracle Of Omaha, Portfolio Construction, Procter Amp Gamble, Screening Processes, Vf Corp, Warren Buffett
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