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Dividend Growth Investing Doesn't (Necessarily) Work

Published Thu, 26 Mar 2020 04:01:46 -0400 on Seeking Alpha

Bad news for dividend growth investors.
Dividend growth ETFs fail the market stress test.
An alternative approach to consider.
The best thing about a ferocious and sudden bear market is that it provides us all with a golden opportunity to see which investment strategies work... and which do not. And by "not working," I simply mean that the portfolio doesn't offer higher returns with less risk than a cheap and basic alternative such as an S&P 500 index fund.
If you are like me, you gravitate towards the idea of owning companies with lengthy histories of consistently rising dividends. These seem like they must be lower-risk companies than their counterparts, having stood the test of time and generously lined the pockets of their eager shareholders. If the dividend growth is fairly consistent, that's a nice steady stream of income the investor can reinvest for compound returns (and what works better than compounding over the long term)? In theory, dividend growth sounds like a great investment approach. Right?
There's just a little wee bit of a problem. A fly in the ointment, as it were. The proverbial monkey wrench caught in the gears. Dividend growth investing does not (necessarily) work.
Dig this. Using a portfolio backtesting tool available on Portfoliovisualizer.com, I constructed an equal-weight portfolio comprised of 5 widely held dividend growth ETFs: the iShares Select Dividend ETF (DVY), the SPDR S&P Dividend ETF (SDY), the Vanguard Dividend Appreciation ETF (VIG) and its higher-yielding counterpart Vanguard High Dividend Yield ETF (VYM), and the Schwab US Dividend Equity ETF (SCHD). These are five examples of passive funds with varying (often intersecting) selection criteria for dividend growth stocks. Assuming you rebalance the holdings annually and reinvest every dividend, how would your performance compare against the S&P 500 from November 2011 (when SCHD first started trading) through today? Answer: Horribly.

The... Read more

Stock name Last trade   P/E Earnings/Share Dividend/Share Dividend yield
ISHARES DOW JONES SELECT DIVIDEND INDEX FUND 103.22   0.0 0.00 3.37 3.31
VANGUARD HIGH DIVIDEND YIELD ETF 89.75   0.0 0.00 0.00 2.79
SPDR S&P DIVIDEND ETF 103.80   0.0 0.00 2.42 2.36
VANGUARD DIVIDEND APPRECIATION ETF 120.84   0.0 0.00 0.00 1.58

ISHARES DOW JONES SELECT DIVIDEND INDEX FUND - DVY
ISHARES DOW JONES SELECT DIVIDEND INDEX FUND - DVY  


Older articles featuring Ishares Dow Jones Select Dividend Index Fund (DVY):
Performance Of Dividend ETFs During The Crash
Reduce Volatility With High Yield - The Income Method
The Vanguard High Dividend Yield ETF: A Well-Managed Dividend Play
The Retiree's Dividend Portfolio - John's Year-End Review
No Dividend-Strategy ETFs Are Dividend Champions, But There Is One Contender
The Best ETF For Dividend Growth Investors
Dividend Income Strategies Lagging In Strong Up Market
3 Black Friday Dividend ETF Deals
Dividend Payers A Winning Strategy In A Volatile Equity Market
WisdomTree High Dividend ETF: Combining What's Classic With What's New

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