There are numerous variations on the theme of dividend investing. Sometimes, though, it’s important to get back to basics.
With that in mind, Barron’s asked Morningstar to compile a list of dividend-focused mutual funds. The accompanying table, culled from that list of about 250 funds, shows the top-five-performing portfolios based on five-year returns as of Feb. 28.
Past is not prologue, of course, and outperformance can fade, sometimes quickly. Still, it can be instructive to analyze funds that have outperformed their peers. In this case, we looked at five-year track records, as many of the funds in the longer list Morningstar provided do not have 10-year track records.
It’s important to remember that these five funds, in varying degrees, track indexes. (All of them, as it happens, are exchange-traded funds.) That’s a much different approach than active management, in which the portfolio managers select all of the stocks in their portfolios. Next week this column will take a look some actively managed funds that have outperformed their peers.
Three of this week’s top-performing funds have a value bent. The Invesco S&P 500 High Dividend Low Volatility ETF (SPHD) and the Oppenheimer S&P Ultra Dividend Revenue ETF (RDIV) are large-cap value funds. Morningstar categorizes the Invesco High Yield Equity Dividend Achievers ETF (PEY) as mid-cap value.
The WisdomTree U.S. Quality Dividend Growth ETF (DGRW) falls into the large-cap blend category. There’s also a technology fund in the mix.
One thing all five have in common is that they’ve outperformed the S&P 500’s (.SPX) five-year return of 10.67%.
The nearly $780 million Invesco High Yield Equity Dividend Achievers ETF came in first, with a five-year annual return of 12.3%, besting the S&P 500 by about 1.6 percentage points. The fund typically invests at least 90% of its assets in dividend-paying stocks that are in the Nasdaq US Dividend Achievers 50 Index.
Hewing to that index, the fund is reconstituted once a year, and it’s rebalanced quarterly. The fund’s largest holding recently was Ryder System (R), which leases trucks and manages fleets. Its yield was 3.5%.
The fund’s other large holdings included AT&T (T), IBM (IBM), and various utilities such as PPL (PPL), Southern Co. (SO), and Edison International (EIX).
The Invesco S&P 500 High Dividend Low Volatility ETF has a five-year annual return of 12%, second on the list. It mimics the S&P 500 Low Volatility High Dividend Index, which “measures the performance of the 50 least volatile high dividend-yielding stocks in the S&P 500,” according to S&P Dow Jones Indices.
The fund’s top holdings include Philip Morris International (PM), Ford Motor (F), Altria Group (MO), Iron Mountain (IRM), and AT&T.
Morningstar praises the fund for delivering “a high yield while keeping risk in check,” though it “often takes large sector bets.” But based on five-year returns, the fund was less volatile than the S&P 500. Its recent yield was around 4%, topping the Barron’s list.
As of March 5, the fund’s largest sector concentration was real estate, at 22.4%, followed by utilities (15.8%), energy (14.9%), financials (13.3%), and consumer staples (11%). A little more than half of its stocks are considered large-cap value.
The $920 million First Trust Nasdaq Technology Dividend Index ETF (TDIV) had the advantage of focusing on a sector that’s had the wind at its back. The tech companies in the S&P 500 have a five-year annual return of 17.5%, compared with 10.5% for the broader market.
But the fund has acquitted itself well among dividend-oriented portfolios. Its five-year return of 11.7% ranks fourth among the funds included in the table.
The portfolio’s holdings include many legacy tech companies, such as IBM, Intel (INTC), Cisco Systems (CSCO), Apple (AAPL), Oracle (ORCL), and Texas Instruments (TXN).
The ETF seeks to track the Nasdaq Technology Dividend Index, which is rebalanced quarterly. Although it ranks highly among dividend funds, it did not fare nearly as well in Morningstar’s tech-fund category. Its five-year return places in the bottom quarter of that group.
The $1.6 billion Oppenheimer S&P Ultra Dividend Revenue ETF selects stocks in the S&P 900—which includes both large- and mid-cap stocks—“with the highest trailing dividend yield,” according to OppenheimerFunds. Each security is weighted by revenue, not market capitalization.
Its top holdings include Exxon Mobil (XOM), which yields 4.2%; Chevron (CVX), whose yield is 3.9%; and General Motors (GM), which also yields 3.9%. The fund, which has a value orientation, is rebalanced quarterly.
The other fund on the list is the $2.7 billion WisdomTree U.S. Quality Dividend Growth ETF. Its five-year annual return is 11.3%.
Its largest holdings include Exxon, Apple, Microsoft (MSFT), Verizon Communications (VZ), and Wells Fargo (WFC). The fund tracks the WisdomTree U.S. Quality Dividend Growth Index. It consists of the 300 companies in the WisdomTree U.S. Dividend Index with the best combined rank of growth and quality factors.
The large-cap fund has more of a growth focus than some of the other funds on the list. At 2.32%, it sports the lowest yield among the five funds. Dividend investing, however, can come down to a trade-off between growth and yield. Those stocks with better growth prospects don’t always sport the highest yields.
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