Yes, This ETF Offers Dividend Growth

Professionals and pundits can argue until the cows come home about why conservative, low volatility sectors such as consumer staples and health care have been leading the market higher for about three years now. An obvious reason is that these sectors and some others are chock full of stocks that can be considered dreams come true for dividend growth investors.

Sure, Procter & Gamble PG had a rough day Wednesday, but investors will likely let one bad day slide in exchange for P&G's dividend increase streak that has spanned over five decades. Same for Johnson & Johnson JNJ. Was it any surprise that Exxon Mobil XOM boosted its payout Wednesday? Not really, the largest U.S. oil company has been doing just that for about three decades.

Bottom line: Investors love dividends, but the truly savvy really love dividend growth stocks. However, some dividend growth investors may think dividend growth is not a part of the game with ETFs, even with those ETFs that are explicit dividend funds.

It is probably just a simple misunderstanding. After all, with equity-based ETFs, it is underlying components that drive the fund's price action, so logically speaking it would also be the holdings that dictate the ETF's payout and yield. With those factors in mind, we examined the WisdomTree Dividend ex-Financials Fund DTN as possible ETF option for dividend growth investors.

DTN was selected for a few reasons. First, it is chock full of U.S. large-caps. Second, the ETF's underlying index has had a beta of just 0.78 and annualized volatility of less than 12.3 percent since inception, according to WisdomTree data. Finally, DTN was picked because it excludes financial services stocks and we wanted to see if that insulated investors from dividend cuts during the financial crisis.

To that last point, DTN did "fail", sort of, in the 2008-2009 time frame. The ETF's 2008 payout was $2.10 per share, but that slumped to about $1.55 a share in 2009, according to issuer data.

However, DTN rebounded to a payout of $1.61 per share in 2010. At the sector level, DTN does represent a valid option for conservative dividend growth investors with utilities and consumer staples names combining for nearly 30 percent of the ETF's weight. Five utilities are found among the ETF's top 10 holdings.

Interestingly, DTN's top-two holdings, Exelon EXC and CenturyLink CTL, are recent dividend cutters and in a big way. Exelon, for example, will pay a second-quarter dividend of 31 cents down from 52.5 cents a share in the first quarter.

DTN offers some buffer those cuts on two levels. First, the ETF only allocates 2.45 percent to Exelon and 1.99 percent to CenturyLink. Second, DTN is home to plenty of other prodigious dividend raisers.

For example, top-10 holding Reynolds American RAI has nearly tripled its dividend since 1999. Dow components AT&T T and Verizon VZ are also working on impressive, multi-year dividend increase streaks. Intel's INTC dividend has more than tripled since 2005 and Altria MO is in the midst of a multi-decade dividend increase streak of its own.

Bottom line: DTN offers dividend growth without being one of the ETF's that screens by length of dividend increase streak. DTN's underlying index weighs possible constituents by yield, market capitalization, liquidity, earnings and other factors, but not dividend increase streaks.

The result is DTN paid a 2010 dividend of $1.61, which rose slightly to $1.64 the following year. In 2012, DTN paid $2.42 a share. It must also be noted that DTN pays a monthly dividend, which can be more useful for investors looking to reinvest dividends more than just four times a year or for those investors that need a more consistent income stream.

Specific to DTN, some folks may wonder how will the ETF's dividend growth trajectory fair now that bank dividends are starting to come back and the ETF offers no exposure to that sector. Fortunately, the answer is encouraging. DTN's third-largest sector weight (nearly 13 percent) is technology. Technology is now the largest dividend-paying sector in dollar terms in the U.S. and also the fastest-growing growing dividend sector.

One more thing to consider: Over the past three years, DTN has gained 60 percent with 15.2 percent volatility. The SPDR S&P Dividend ETF SDY, which requires its holdings to have dividend increase streaks of at least 25 years, has returned 44.8 percent with 16.3 percent volatility over the same time.

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