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Dividend Aristocrat ETF or Dividend Achievement ETF?

02 March 2010 at 1:02 am by Gary Gordon     Bookmark and Share    Follow EtfExpert on Twitter

In the 70s, buy-n-hold investors in the U.S. didn’t experience¬†capital¬†gains for 16 years (1966-1982); they didn’t see any cap app¬†for the¬†10 years¬†(2000-2009) of¬†the last decade either.

That’s why dividend enthusiasts like to remind the “easy money” crowd that you can’t count on prices going higher. However, you may be able to count on cash flow or reinvested dividends from companies that reliably and consistently¬†increase their payouts to shareholders.

As an aside, some dividend-oriented investors¬†maintain the same, tired, “you can’t time the markets” mantra. Ergo… stick with dividends. Yet buying-n-holding through bear markets is madness. You don’t have to be a market timer to use unemotional stop-losses or to purchase insurance with put options.

It follows that the most sensible¬†approach is to avoid the¬†bulk of the bear damage in¬†seismic sell-offs (e.g., 73-74, 81-82, 00-02, 08-early 09). With an approach for losing less in bad times, you don’t need to make as much when the bull bounces off the bear’s trampoline!

But I digress. I did want discuss the power of what the dividend-happy folks call “dividend aristocrats.”

Aristocrats are S&P 500 companies¬†that have increased their payouts for 25 consecutive years. You’re not an aristocrat if you miss a single year. Moreover,¬†statisticians suggest that “aristocrats” have out-muscled the S&P 500 over 5, 10, 15, 20 and 25 years with less beta volatility!

Okay… that’s good stuff. Yet there’s only a single ETF that lets you invest in aristocrat-related ETFs. I say “aristocrat-related,” because State Street offers the SPDR S&P Dividend Fund¬†(SDY) that seeks to replicate the price and yield of the S&P “High Yield” Dividend Aristocrats Index.

In other words, SDY further peels off some of the¬†stocks such that… only the 50 highest yielding aristocrats are included. Meanwhile, the spin-off index only has 4 1/2¬†years of data.

Okay… so how had SDY done since inception? There’s no evidence of out-performance for the spin-off aristocratic tool. (Again, who would want to ride this roller coaster off the tracks during a serious down cycle?)

SDY Versus SPY Inception

The results for tracking the Mergent Dividend Achievers Select Index were a little better. Vanguard Dividend Appreciation (VIG) got the better of the S&P 500 SPDR Trust (SPY), though the exceptionally short time frame of less than 4 years is worth noting. Moreover, the Mergent Dividend Achievers Select Index only requires participating companies (142) to increase dividends in each of the previous 10 years.

VIG Versus SPY

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Disclosure Statement: ETF Expert¬†is a web log (‚ÄĚblog‚ÄĚ) 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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