Drivers of Dividend Focused Portfolios

It was a strange year for dividend-focused investors in 2015. Expectations of when the Federal Reserve would end its highly accommodative monetary policy, coupled with some sector specific issues, caused many high-dividend-yielding pockets of the market to decline.

Yet, according to data from S&P Dow Jones Indices, it was the fourth consecutive year of annual record cash payments by S&P 500 companies as dividends rose 10% in 2015. Further some high-yielding companies were acquired. Not surprisingly, the performance of U.S. dividend ETFs varied depending on their holdings.

Examples of companies that raised their dividend by more than 10% last month were Amgen (AMGN), Boeing (BA), and PulteGroup (PHM). Meanwhile, Kinder Morgan (KM ) cut its dividend 75%.

S&P Capital IQ has rankings on approximately 850 equity ETFs. Among U.S. dividend-focused ETFs, 11 had positive returns while 32 were negative in 2015. But the losses incurred by the worst performers far exceeded the gains of the top performers.

Guggenheim Investments Multi-Asset Income ETF (CVY) declined 14% year to date. Relative to the S&P 500 index, CVY had greater exposure to oil, gas & consumable fuel companies (17% of assets) and REITs (9.6%) that were hit hard. In addition, CVY has exposure to stocks in other industries that had company-specific challenges such as Viacom (VIAB 41). The ETF is relatively diversified at the security level, with approximately 150 positions; top-10 holdings comprised 12% of assets.

In contrast, PowerShares S&P 500 High Dividend Low Volatility Portfolio (SPHD Overweight) was up 5.2% in 2015, being the best performer in this peer group. This occurred despite the ETF's relatively hefty exposure to electric utilities (11%) and multi-utilities (9.7%), as both S&P 1500 industries were down for the year.

However, SPHD holds stakes in two such companies that agreed, pending necessary approvals, to be acquired at premium valuations mid-year. Utilities AGL Resources (GAS) and TECO Energy (TE), as well as Phillip Morris International (PM), were all strong performers for SPHD.

Another strong performer was First Trust Morningstar Dividend Leaders Index Fund (FDL), which was up 2.6%. Relative to the S&P 500 index, tobacco companies (9.6% of assets) and industrial conglomerates (8.5%) had hefty weightings. We think gains from Altria (MO) and General Electric (GE) contributed favorably to performance.

The U.S. dividend style became even more crowded by the end of the year, as Legg Mason launched its own low volatility high dividend ETF in late December, based on a proprietary index.

According to S&P Dow Jones Indices, based on current divided policies, 2016 is set to be another record year for S&P 500 dividend payments. However, we believe that investors should still consider how various dividend ETFs are positioned before allocating capital. As always, past performance is not necessarily indicative of future results since it is the individual fund's fundamentals and valuation that usually drives performance.