For those who manage their own portfolio of individual stocks, this is likely the most popular style of investing. Investors seek out companies that have grown their dividends over time. That can help find quality and financial strength and profitability. There are many options by way of US dividend growth ETFs.
The dividend growth lines in the sand might be 5 years, 10 years and 25 years. US dividend growth ETFs come in many shapes and sizes. And that is to say, the number of consecutive years that a company has increased its dividend. I believe that to make this approach meaningful one might look to a meaningful dividend growth history.
The Dividend Achievers Index.
That 10-year history will get you the label of a Dividend Achiever. You can access that group by way of a Vanguard US dollar ETF. Vanguard calls that the Dividend Appreciation Fund. It can be had by way of the ticker VIG. You would hold that ETF in your US dollar accounts. There are certainly benefits with respect to your RRSP and taxable accounts.
The Dividend Achievers Select Index requires that 10-year history of dividend growth. The index also applies proprietary financial health screens seeking greater dividend stability. Along for the ride, of course, is the potential of greater financial health for the index constituents.
Here are the top ten holdings …
|2||Procter & Gamble Co.|
|5||Johnson & Johnson|
We see a mix of some nice growth and those blue chip rocks such as Procter & Gamble, Walmart, Johnson & Johnson and McDonald’s.
We will see a sector composition that differs ‘greatly’ from that of the cap weighted S&P 500. Here’s the sectors for VIG . We see less allocation to technology and the absence of any energy stocks, for starters. There is greater allocation to consumer stocks and industrials.
Seeking better risk adjusted returns.
The returns for VIG vs the broad market funds are similar. But we do see slight out-performance and better risk adjusted returns. Portfolio 1 is VIG.
You’ll notice that the drawdown in the financial crisis was 41% for VIG vs almost 51% for the S&P 500. The returns include dividend reinvestment.
If we look closer at the correction and moving through the period …
This potential of less volatility and of a lesser drawdown in a major correction is the attraction of a meaningful dividend growth history. Equal or greater credit would also have to go to the financial screens. Those screens caught many of the troubled US financials before the meltdown. But the screens did not spot all of the trouble makers.
The original top 10 achievers.
If you follow me on Seeking Alpha, you’ll know that I’ve spent too much time looking at the index and the individual holdings. I spent too much time looking at US dividend growth ETFs as a rule.
From my article the original top 10 Dividend Achievers beats the S&P 500.
Back in May of 2006 the top 10 holdings of the index were Chevron, Exxon Mobil, Procter & Gamble, Coca-Cola, IBM, General Electric, Johnson & Johnson, Wal-Mart, PepsiCo and American International Group.
What an ugly duckling group.
Here’s the top 10 (original) vs VIG vs the market.
The VIG screens plus a larger cap bias, was a good combination. The bedrock of the blue chip staples was more than enough to compensate for the near wipe out of GE and AIG. As per my article link here’s the Great 8 vs the market in that correction.
I had previously held VIG, I switched to skimming the index in early 2015, buying 15 of the largest cap achievers. We have 3 picks by way of Apple, BlackRock and Berkshire Hathaway. Yes, Mr. Buffett has also been busy acquiring those Apple shares. That makes me feel not ‘quite as bad’ when I sell Apple shares to fund trips and such.
This Summer homemade Apple dividends will help take us to Portugal.
Does a 10-year history mean much in 2020?
Usually a 10-year period would mean that a company has gone through a correction or two without cutting its dividend. We have not had a real stock market correction for over 10 years. The US markets have been roaring since early 2009. The 10-year period has not tested dividend sustainability. It’s mostly up to those dividend health screens perhaps. But I would certainly not (completely) discount the dividend growth factor.
The dividend income and dividend growth.
VIG dividends held up quite well in the financial crisis. There was a very slight decline in 2009 vs 2008. There was a 5% reduction in dividend payments. The fund then got back on that dividend growth trajectory.
But compare that to the S&P 500. As we can see dividends are not always forever.
S&P 500 dividend fell by 23% percent according to Simply Safe Dividends.
Those seeking even greater dividend payments were hit a little harder. Vanguard’s High Dividend Yield Fund VYM is one of the more popular US dividend growth ETFs. Here’s the scorecard thanks to SSD.
VYM’s dividend payments were hit hard during the financial crisis. The fund’s total dividend payments peaked in 2008 at $1.44 per share before falling to $1.17 in 2009 and $1.09 in 2010, representing a peak-to-trough decline of about 25%.
The greater dividends found greater dividend disruption and a greater drawdown as well. Not a big deal if you’re in the accumulation stage perhaps. But if you were in retirement and ‘living off of the dividends’ you would have had to make due with less for a few years. You would also have inflation eating away at the spending power.
The answer of course, would have been to sell some shares. And one could protect against that sequence of returns risk by holding some bonds and other non-correlated or lesser-correlated assets.
The total return approach.
Keep in mind that while the Dividend Achievers Index has an income focus, it is a total return approach. The yield is quite low. It is simply seeking better risk adjusted returns. It is the major market corrections that throw investors off the track. Lesser volatility and a less severe drop in portfolio value in corrections might help the cause. There are perhaps even greater benefits in retirement.
And yes, one may go the route of the low volatility equity ETFs. My review of BMO’s Low Volatility ETF was more than popular. There’s more than one way to find quality and portfolio stability.
You may skip the dividends. For a pure quality screen you may have a look at BMO’s MSCI USA High Quality Index ETF. I will be back with a look at that index and fund performance. That fund seeks a mix of growth and higher quality.
Achievers vs Aristocrats.
The most noble of the dividend growth gang is the Dividend Aristocrats Index. That index requires a 25-year history of dividend growth. That truly puts financial strength and durability to the test. With that index we find a history of risk adjusted returns that is superior to Achievers and ‘the market’. Those Aristocrats are culled from the S&P 500. The approach has been tracked from 1990, with no survivourship bias.
I will be back soon with a dedicated post on those Dividend Aristocrats.
Thanks for reading my look at VIG. Of the US dividend growth ETFs, it is the most widely held. Perhaps for good reason.
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