This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

A Dividend ETF That Merits a Look

If you have done any research on exchange-traded funds in the last few months, you've probably glanced at more than a few so-called dividend ETFs, that is, funds designed to one way or another have a higher yield than that of the broad market.

Some of my past articles have likely contributed to the glut of dividend ETF information out there, but there is one fund I know about that gets almost no notice, no news coverage and virtually no volume: the First Trust Morningstar Dividend Leaders Index Fund (FDL).

This fund could be poised for good growth over the next year, especially because of its unique weighting toward mega-cap stocks, and I believe it deserves attention.

The ETF's prospectus states that its stock-selection process is proprietary, but that for a stock to be considered, it must pay dividends that are qualified for the 15% tax rate, have five years of dividend growth "greater than or equal to zero" and have a coverage ratio greater than 1. From there, the description gets even more opaque.

Unlike most dividend ETFs, FDL makes some relatively large bets on a few stocks. Bank of America (BAC) is the largest holding, at 9.79%, followed by Citigroup (C) at 9.36% and Pfizer at (PFE) at 9.07%.

There are six stocks each with greater than 5% weight in the fund, and the top 10 stocks comprise 65% of the ETF. The other 90 holdings are spread across the remaining 35% of the fund.

Like all dividend ETFs, FDL is heaviest in financials, at 36.73%, and utilities, which make up 13.15% of holdings. Unlike most other dividend ETFs, though, FDL is heavy in telecom and health care, which come in at 16.94% and 16.74%, respectively.

As the chart below shows, FDL has soundly outperformed both the PowerShares High Yield Equity Dividend Achievers Portfolio (PEY) and the iShares DJ Select Dividend Index Fund (DVY) for the last six months, which is the period of time FDL has been trading.



First Trust Morningstar Dividend Leaders Index Fund
Makes some relatively large bets on a few stocks
Source: BigCharts.com

I believe a big chunk of FDL's lead can be attributed to its weight in telecom. That sector, as measured by the Vanguard Telecom Index (VOX), has outperformed DVY by six percentage points over the last six months, the percentage by which FDL has outperformed DVY over the same period. Using VOX as a proxy, FDL may have picked up as much as 1.3% in outperformance by being so heavily weighted toward telecom. Its Pfizer stake, which is up 10% in the last six months, also has helped.

If dividend is important to you, you should know that FDL yields 3.57%, compared to DVY's 3.40% and PEY's 4.27%.

As I mentioned above, FDL distinguishes itself through its weighting in mega-cap stocks, or shares in companies with market caps greater than $100 billion. The ETF has 50% of its assets in mega-caps, compared to DVY's mega-cap weighting of 15.5% and PEY's 8.5%.

I believe that this mega-cap approach, while normally a potential hindrance, could be an advantage over the next year or so. Typically, mega-caps provide leadership toward the end of the stock market cycle, and with the current bull market having enjoyed a 3 1/2-year run so far, it makes sense to think about this cycle ending.

At other points in the market cycle, leadership would probably rotate to dividend ETFs concentrating on smaller companies, which brings up a great closing point: ETFs, including dividend ETFs, are not necessarily "set and forget" investment vehicles. All dividend ETFs have unique structural differences, and knowing how they are affected by the market's swings can benefit your portfolio's bottom line.

At the time of publication, Nusbaum was long BAC and VOX as client holdings, although positions may change at any time.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, Ariz., and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback; click here to send him an email.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,985.61 +78.99 0.47%
S&P 500 1,972.83 +9.12 0.46%
NASDAQ 4,419.0340 +27.5710 0.63%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto
Advertising Partners

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs