Dividend Growth Alternatives

According to Howard Silverblatt, senior index analyst for S&P Dow Jones Indices, for the 12-month
2-month period ended June 2015, 3,092 companies increased their dividend payments. In the second quarter, 562 of these increases occurred. In contrast, just 389 companies decreased their dividend payments in the 12-month period ended June, with 85 of them occurring in the second quarter. The nearly 8-to-1 increase/decrease ratio confirms that companies are returning more cash to shareholders.

For example, Johnson & Johnson (JNJ) announced a 7% dividend increase in April that was implemented in June. The health-care company has a long history of raising its dividend annually, as confirmed by the above-average S&P Capital IQ Quality Ranking of A+. The stock has a 3.0% dividend yield.

Looking at the S&P 500, 84% of the constituents pay a dividend, but not all sectors have the same focus on returning regular cash to shareholders. For example, all 30 utilities and 28 of the 29 materials companies (97%) pay a dividend. Meanwhile, just 58% and 69% of health care and information technology constituents do so, though some such companies such as Gilead Sciences (GILD) initially paid a dividend of $0.43 during the second quarter.

In light of the broad array of dividend payers, investors can look to diversified index-based dividend ETFs. However, what's inside them can be different, even if you focus on just those with a dividend growth angle.

Vanguard Dividend Appreciation Index (VIG) holds 188 companies that have raised a dividend each of the last 10 years. VIG's biggest sector allocation is consumer staples (27%), followed by industrials (21%) and information technology (14%), while exposure was limited for energy (1%) and financials (4%). The ETF has a 0.10% expense ratio and sports a 2.2% dividend yield.

Meanwhile ProShares S&P 500 Dividend Aristocrats (NOBL) holds the 53 S&P 500 constituents that have raised their dividend each of the last 25 years. As such, while consumer staples (25%) and industrials (16%) are also the two largest sectors, financials (13%) companies are well represented; technology exposure is meager (2%). NOBL has a 0.35% net expense ratio (0.70%
gross) and a 1.9% dividend yield.

WisdomTree US Dividend Growth (DGRW) focuses on dividend payers with strong long-term earnings growth expectations as well as strong three-year returns on assets and equity. With a forward growth bias, not surprisingly, technology (20%) and consumer discretionary (19%) companies are well represented among the approximately 300 holdings. Of the three ETFs highlighted, DGRW has the largest stake (7%) in energy, but the lowest in consumer staples (13%). DGRW has a 0.28% expense ratio and a 2.0% dividend yield.

Do the different approaches and resulting sector exposures matter? Well, in the past 12 months, NOBL was up 11.8% and DGRW was up 10.5%, both ahead of the 8.9% of the S&P 500 Index as of July 13. Meanwhile, VIG lagged all three with a more modest 5.7% gain, despite a lower expense ratio.

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