Picking Dividend ETFs

By Morningstar

The battle of the dividend-focused exchange-traded funds may already be over. At least in terms of assets and fund flows, iShares Dow Jones Select Dividend Index (DVY, news, msgs) looks dominant. Its main rival, PowerShares HighYield Dividend Achievers (PEY, news, msgs), has amassed a respectable $287 million in net assets since its December 2004 launch. However, that's still less than a third of the $947 million in net new money that iShares Dow Jones Select Dividend gathered in the first two months of 2005.

Asset flows don't tell the whole story, though. Despite the size disparity, it's hard to render definitive judgment on which ETF is better because their real-world track records are so short (the iShares ETF has been around for less than two years and the PowerShares fund for little more than one quarter). That doesn't stop people from asking, however, so let's look at how these two yield-centric ETFs stack up so far.

On the surface, the funds look similar: They both try to offer exposure to stocks that have above-average yields and the ability to continue paying and increasing their dividends. The benchmarks they track, however, use different recipes.
The details
The Select Dividend Index, which was created in 2003, looks for 100 stocks in the Dow Jones U.S. Total Market Index that have increased their dividends over the last five years without ever missing or cutting a payout. To ensure its constituents are liquid and financially viable, the Select Dividend Index requires its members to have three-month average daily trading volumes of at least 200,000 shares and to have retained an average of 40% of their earnings in the previous five years. The bogey weights its components based on the dollar amount of their dividends and rebalances once a year in December.

The PowerShares fund, on the other hand, tracks the Mergent Dividend Achievers 50. That benchmark includes the 50 highest-yielding members of the Dividend Achievers, a list of stocks that have increased their dividends in each of the last 10 years. Equity data and research firm Mergent has compiled the list for more than 20 years, but the Dividend Achievers 50 has been published only since late 2004. The index's quality screen is its insistence on a consistent record of dividend increases. It arranges its holdings by yield and rebalances quarterly.