This column was originally published on RealMoney.com on June 22.
my June 4 column I highlighted a relatively new exchange-traded fund (ETF) launched by Barclays Global Investors in 2003. The
Dow Jones Select Dividend
fund is a diversified basket of 50 high-quality dividend-paying stocks that can be purchased with one transaction, just like buying a stock. The basket trades like a stock and has a relatively low annual management fee of 0.40%. The dividend yield is presently about 3.6% before the management fee is factored in.
For investors seeking immediate diversification in blue-chip, dividend-paying stocks, this ETF is a great way to go. But many
subscribers would rather own individual stocks. You probably also like to have some control of your investments, which you can't get in a mutual fund or an ETF. And you may also have a problem paying a management fee if you're doing most of your own research.
If you're a hands-on investor and want to make your own stock selections, you can still do so by piggybacking on the excellent selection criteria that are used to choose the 50 stocks that comprise the Dow Jones Select Dividend ETF. Many owners of ETFs, including the Dow Jones Select Dividend, are investment advisers who demand transparency. They want to at any time be able to look into the baskets they own for their clients.
As a result, the companies that create and manage the baskets show us the underlying components on their Web sites. The Dow Jones Select Dividend is no exception, and its holdings can be viewed
here. The great thing about this transparency is that you can also create your own basket, avoid the ETF management fees altogether, and even tweak the holdings a bit.
A La Carte
Creating your own basket of dividend payers is relatively easy. I would suggest buying perhaps 25 of the Dow Jones Select Dividend fund's stocks. I would focus my purchases on those with the heaviest weightings in the basket itself, so that you will more closely track the basket's returns. Owning the stocks with the 25 heaviest weightings in the basket would give you a very nice representative sample, and you'd also have more control of the selection process, if you wanted to.
Having said that, I wouldn't mess around too much with the components of the basket you've created. Why? Dow Jones uses an excellent filtering process to determine the 50 components of this basket, and the track record has been pretty darn good, too.
Dow Jones selects the highest-yielding stocks from the Dow Jones Total Market Index (excluding REITs) and then filters through the highest yielders using a few other criteria. It screens the stocks for five years of dividend growth, an average five-year dividend payout ratio of 60% or less, and an average daily dollar trading volume of more than $1.5 million.
You end up with a basket of high-quality dividend-payers that have shown a history of paying and raising dividends -- exactly what you want if you're a conservative stock investor looking for cash flow and growth potential. To keep it simple, Dow Jones only rebalances this basket once annually. Thankfully, it also makes managing and rebalancing your own basket of stocks pretty darn easy.
Once you've selected your 25 stocks from the DVY's components (again, I'd suggest owning the 25 stocks with the heaviest weightings), you can simply rebalance it once annually, when Dow Jones does its own rebalancing. You'd want to make sure the components you own still reflect the basket, so you would exclude and include whichever stocks make up the heaviest weightings after the annual rebalancing.
On a conference call I heard recently by Dow Jones about DVY, it was mentioned that annual turnover on the basket was anticipated to run at approximately 20%. This low turnover is certainly attractive and means you'd only be replacing about five names per year in your own basket of 25 stocks.
I like the idea of creating my own basket of dividend payers and piggybacking on the components of DVY. Again, you hold the individual stocks yourself and you can also tweak the selection process a bit if you want to. You can also rebalance more than once annually if you wish, and you certainly have excellent control of your tax situation. Last, you would save yourself the 0.40% annual management fee, although you'd still have to pay the brokerage commissions to buy your initial 25 stocks and then to replace a few of the components each year. Still, with commissions deeply discounted these days, I don't think that will dent your pocketbook much.
Here's a look at the top 25 components of DVY (based on their weighting in the basket) as of this writing:
At time of publication, Chaussee and/or his clients were long Altria, Bank of America, Black Hills, Comerica and Occidental Petroleum, although holdings can change at any time.
Stuart Chaussee is a registered investment adviser specializing in dividend-paying, blue-chip stocks. He is also the author of three investment books, including Advanced Portfolio Management: Strategies for the Affluent. At time of publication, neither Chaussee nor his clients held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Chaussee cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to