DowYields: A Potential Problem for Dividend ETFs

Yields on 10-year U.S. Treasurys jumped to 2.59 percent on Tuesday. That means 165, or a third of the S&P 500 constituents sport yields in excess of 10-years. That is down from 257 stocks, 51.4 percent of the S&P 500, at the end of the first quarter, according to Bespoke Investment Group. The below-Treasuys-yield situation is even more pronounced with Dow Jones Industrial Average where seven of the index's 30 members do not even yield two percent. Those stocks are Alcoa AA, American Express AXP, Bank of America BAC, Boeing BA, International Business Machines IBM, Walt Disney DIS and United Health UNH. Of the remaining 23 Dow stocks, Wal-Mart WMT, the world's largest retailer, currently yields 2.6 percent, the same a 10-year Treasurys. However, there are five more names that yield less than U.S. 10-years. That groups is comprised of Home Depot HD, Hewlett-Packard HPQ, 3M MMM, United Technologies UTX and Travelers TRV. Further increases in the 10-year yields could make some popular dividend ETFs that are heavy on Dow stocks less attractive. It has already been pointed out that a 10-year yield in the 2.4 to 2.6 percent area means some marquee dividend ETFs offer yields well below those of Treasurys. However, if yields on 10-years keep climbing, some Dow stocks found in popular dividend could be passed over. Big Dividend ETFs Not Always Best For as much as it has been proven that the biggest ETFs are not the best ETFs, particularly when it comes to dividend funds, investors continue to reward the largest dividend ETFs with new capital. Still, SPDR S&P Dividend ETF SDY has a 30-day SEC yield that is slightly below 10-years. The Vanguard Dividend Appreciation ETF VIG does not even yield 2.2 percent, according to Yahoo Finance data. Yet, because these ETFs and others focus on dividend increase streaks, it's not surprising that some of the Dow's lowest yielders are on prominent display within these funds. SDY is a pseudo-equal weight product, so none of its holdings receive a weight of more than 2.5 percent, but 3M and Wal-Mart are found in this ETF. If the yields on 10-year Treasurys jumped to three percent, that would top the current yields sported by popular dividend stocks and ETF components Coca-Cola and Exxon. VIG may be even more problematic. At the end of the first quarter, Wal-Mart, IBM and United Technologies were found among the ETF's top-10 holdings, combing for 11.3 percent of the ETF's weight. Said another way, at least 11.3 percent of the largest dividend ETF's holdings now yield less than 10-year Treasurys. 3M is VIG's eleventh-largest holding Alternatives Investors looking for a robust concentration of Dow stocks with better yields than 10-year Treasurys have plenty of ETF options and few require going off the beaten path. The popular Vanguard High Dividend Yield ETF VYM features nine of those Dow stocks among its top-10 holdings, a group that represented 31.8 percent of the ETF's weight at the end of the first quarter, according to Vanguard data. The First Trust NASDAQ Technology Dividend Index Fund TDIV only has a 30-day SEC yield of 2.6 percent, but the tech sector is the largest U.S. dividend-paying sector and is expected to be aprimary driver of dividend growth in the future. TDIV's three largest holdings are the three Dow tech stocks that comfortably yield more than 10-year Treasurys. That trio is Cisco CSCO, Intel INTC and Microsoft MSFT, a group that is over 24 percent of TDIV's weight. The WisdomTree Total Dividend ETF DTD with a 30-day SEC yield of 2.81 percent, has one of the more robust concentrations to the 17 Dow stocks with higher yields than 10-years. Nine of those 17 stocks are found in DTD's top-10 holdings and 13 are found among the ETF's top-20 constituents. Fifteen of DTD's top-22 members are the Dow stocks with better yields than 10-year Treasurys. In total, that group of 15 commands over 29 percent of DTD's weight. For more on ETFs, click here.