US Blue Chips with dividends too

Posted on: May 26, 2011 in: Dividends, US Equities with 0 comments

WisdomTree Dividend ex-Financials Fund ( Ticker: DTN )

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As I wrote last week, with the US economy at mid-cycle, we are looking for an ETF that holds better-quality, dividend-paying stocks to add to our portfolio. I rejected the iShares S&P US Preferred (PFF), despite its tempting 7.2% yield, because it was nearly all financials, among other reasons. The WisdomTree Dividend ex-Financials ETF (DTN) completely shuns financials but that is not why I would choose it. Instead, DTN offers a good balance between quality holdings and a great dividend.

WisdomTree has its own process for selecting DTN’s holdings. It first short-lists the 300 US companies that are 1) the largest by market capitalization, 2) pay a dividend and 3) are not in the financial sector. Then, sector by sector, it selects up to 10 companies in each sector that offer the highest yield.

The result is an ETF that has 85 holdings distributed across all sectors (except financials of course – more on those next week when I look at PGF, a high yield, all-financials ETF that can be combined with DTN). The largest weight is in Utilities at 17% and then Consumer Staples at 12% and Telecommunications at 11%. By comparison, in the S&P 500, those three sectors are 3.3%, 3.0% and 11% respectively. DTN’s ten largest holdings make up 17% of the ETF and include several telecoms and tobacco.

DTN’s dividend is unbeatable. Based on the 12-month trailing payments, the yield is 3.26%. However, based on the current dividend, the forward yield is nearer 4.05%. That’s more than double the forward yield of 1.80% on the S&P 500 ETFs, IVV or SPY. The higher forward yield also suggests there is some room for capital gains from DTN.

Nothing is free however. DTN does dip down in market cap versus the S&P 500. A quarter of its holdings are Mid-Caps, the smallest being Pepco (POM), a $4 billion electric utility. DTN’s Price to Earnings ratio, at 16.4, is also higher than the S&P 500’s 13.3. Nor does DTN offer the best liquidity. Its total assets and average daily volume are both less than I generally prefer but sufficient for most transactions.

However, as mentioned above, with the US economy at mid-cycle, our goal is a moderate reduction in total portfolio risk. For that, DTN is a good choice as part of broadly diversified portfolio.

archerETF Metrix DTN
Category US Equity
Benchmark S&P 500
Total Holdings 85
52 Week High $52.83
Recent Price $51.96
52 Week Low $37.99
Avg Daily Volume 0.04 Million Shrs
Avg Daily Volume ($) $2.31 Million
Total Market Cap $384.30 Million
ETF Annual Fee 0.38%
ETF Trading Currency USD
ETF FX Exposure USD
Annual Volatility 26.3%
Correlation to S&P 500 94.3%
Return to Risk Ratio Not Available
Use of Leverage No
Use of Futures No
6 month Return 14.73%
1 Year Return 34.89%
2 Year Return 74.01%
3 Year Return 12.93%
Dividend Yield (TTM) 3.25%

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archerETF offers Global Tactical Portfolio Management.

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© 2011 archerETF Portfolio Management is a division of Bellwether Investment Management, a discretionary portfolio manager registered with the Ontario Securities Commission. This report is provided for information only and does not constitute investment advice. While we believe the information to be accurate and timely, we make no claim or warranty to that effect. Please seek professional advice before making any investment decision. We may hold positions in any or all securities discussed in this report.

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