Who doesn’t love dividends, right? Apparently, some don’t because they prefer to FOMO into momentum trades where total return is all about price appreciation. If you like to invest focusing on blue-chip dividends, you can easily do so through various exchange-traded funds (“ETFs”) out there. And one in particular worth considering is the iShares Select Dividend ETF (NASDAQ:DVY). This ETF aims to track how the Dow Jones U.S. Select Dividend Index performs. This benchmark keeps track of U.S. stocks known to pay big dividends.
At the heart of DVY’s appeal is its diverse mix of 98 U.S. stocks. These companies have a strong history of paying dividends without fail for the last five years. This strict rule for picking stocks doesn’t just boost the fund’s ability to generate income. It also makes the fund more resilient, as companies that can keep paying dividends often have strong financial health.
A Look At The Holdings
The fund is well diversified. No holding makes up more than 3.17% of the portfolio, and a casual look at the top positions shows plenty of blue-chip well-known companies that have been operating for a long, long time.
iShares.com
What do these companies do? Altria Group Inc. is a tobacco giant and competes with Philip Morris International Inc. AT&T Inc. is a telecom leader and has a strong history of paying regular dividends. Citizens Financial Group Inc. is a regional bank. And International Paper is a paper and packaging leader.
Sector Breakdown
Looking at DVY’s makeup, we see a well-balanced mix of sectors that spreads out risks and makes the most of different income sources. The fund puts the biggest chunk of its portfolio (28.86%) into Utilities.
iShares.com
The Financial sector comes in second, making up 26.31% of the fund’s holdings. This allocation gives investors a piece of dividend-friendly banks and insurance companies, which have a track record of paying out to shareholders. And Consumer Staples make up 10.49% of DVY’s holdings. These stocks tend to hold up well when the economy slows down. They provide a defensive cushion and benefit from steady demand for everyday items people need.
Peer Comparison
DVY has made its mark among dividend ETFs, but it’s worth looking at how it stacks up against similar funds. The Schwab U.S. Dividend Equity ETF (SCHD) is a good competitor to consider. Both are focused on blue-chip dividend payers and give investors access to yield and upside potential. When we look at the price ratio of DVY to SCHD, we find that over the last three years, the funds have been in a range relative to each other. No clear relative momentum winner overall here.
StockCharts.com
Pros and Cons
On the plus side, DVY lets you invest in a select group of U.S. companies that have paid dividends over time. This means the fund not only generates income, but also that the composition of companies means they are fundamentally strong and well-managed. Companies that keep paying dividends even when markets are shaky have solid foundations. And a 30-Day SEC Yield of 3.79% is solid overall. What’s more, the fund’s well-spread-out portfolio reduces concentration risks, making sure no single holding or sector has an outsized impact on overall performance. Sure – Utilities make up nearly 30% of the fund, but this is the most defensive sector of the stock market of all, and consistent from a dividend perspective.
The downside here? While the fund’s emphasis on stocks that pay dividends can offer a consistent income flow, it might also restrict the portfolio’s ability to grow. This happens because companies that make dividend payments a priority often put a smaller share of their profits back into the business. Furthermore, DVY’s lean toward sectors that are considered defensive, like Utilities and Consumer Staples, could lead to weaker performance when the economy is booming. During these times, sectors that are more tied to economic cycles tend to do better. Furthermore, investors should keep in mind the possible tax effects that come with dividend payouts. These distributions face higher tax rates than capital gains for accounts that aren’t for retirement.
Conclusion
I like iShares Select Dividend ETF. The sector allocation is solid, the yield is high, and the volatility profile overall is quite attractive. DVY’s focus on defensive sectors makes it an attractive choice for those who want a steady income stream while spreading out their risk. I think that as the economy continues to slow, funds like this will become more and more important in forming a core part of an equity portfolio.
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