ETF Expert

According to BusinessWeek’s prolific blogger, Howard Silverblatt, the long-term dividend growth rate for S&P 500 constituents is 5.6%. His expectation for 2010, however, is dividend increases of 6.1%.

Why might this be intriguing? In essence, there’s a simple mathematical equation that has done a better job predicting stock price appreciation over time than… well… just about any formula. What’s more, the economist who developed the predictive proxy happens to share my namesake!

Professor Myron Gordon proposed that annual stock returns should equal dividend yields plus the long-term annual growth rate of those payouts. With the S&P 500 yielding approx 2.2%, one might surmise a 2010 return of 7.8%. Or, using 2010 dividend growth alone, one might consider projecting 8.3%.

Keep in mind, most predictive models fail miserably at critical moments. While Myron Gordon’s equation forecasted 9% for the 20th century, not far off the actual 100-year mark, it did not account for panics/collapses/catastrophes at key moments in history. (If you foolishly held onto an-all equity portfolio that fell -38% in 2008, how helpful was it to have wandered into the year with a +6% estimate?)

As readers know, I may enjoy the gamesmanship of making predictions. For instance, at the very start of 2009, I was quoted by Investor’s Business Daily as having made a year-end projection of 1150-1200 on the S&P 500. I’ll be the first one to say that a lot of luck came into “getting this one right.”

In truth, I don’t believe predictions have value. The reason is… they take one’s eye off the primary key to investing success; that is, manage the outcome of each investment for a big gain, small gain or small loss. No big losses!

By the same token, it is welcomed news to read Mr. Silverblatt’s in-depth assessment on 6.1% dividend growth for 2010. Why? Because dividend growth often goes hand-in-hand with earnings growth as well as stock price appreciation.

More specifically, then, are there ETFs geared entirely to “dividend growers?” Indeed there are.

There’s the Vanguard Dividend Appreciation Fund (VIG). It tracks a sub-index of the well-regarded Mergent Dividend Achievers Index. Criteria for participation is pretty steep such that companies must have a record of raising dividends for 10 consecutive years.

There’s also the PowerShares Dividend Achievers Fund (PFM) and PowerShares International Dividend Achievers (PID). The former, PFM, tracks a dividend growth index where companies raised dividends for 10 years, while the latter, PID, has a less stringent requirement of 5 dividend-raising years.

Keep in mind, a whole lot of companies are cautious on committing money to dividends when… these days… decision-makers may favor cash on the balance sheet. Moreover, Dividend Growth ETFs only rebalance quarterly. In other words, companies that didn’t raise dividends, or cut them, may remain in your ETF for 1-2 quarters while the market is busy pummeling the offenders.

If you’d like to learn more about ETF investing… then tune into “In the Money With Gary Gordon.” You can listen to the show “LIVE”, via podcast or on your iPod.

Disclosure Statement: ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above. The company does not receive compensation from any of the fund providers covered in this feature. Moreover, the commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

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