Friday, August 1, 2008

Dow Jones Select Dividend Index Fund ETF (DVY) Analysis

It is important to understand what drives the value of any investment that you make. For individual stocks, we do fundamental and technical analysis. For mutual funds we look at management, track record, historical returns, and methodology. For ETFs it is important to understand the composition of the ETF and how the investments in the ETF are chosen. Today I am going to look under the hood of the iShares Dow Jones Select Dividend ETF (DVY).

The DVY is an ETF focused on U.S. based dividend paying stocks. The ETF tracks the Dow Jones U.S. Select Dividend Index. For ETFs it is important to understand the index that the ETF tracks so that is where I look next.

The Dow Jones U.S. Select Dividend index is reviewed and updated annually. To be considered for the index a stock must meet the following requirements:

-Must be part of the Dow Jones U.S. Total Market Index.
-Must have maintained or increased the dividend per share for each of the past five years.
-Must have a five year average payout ratio of less then 60%.
-Must have an average volume of at least 200,000 shares per day over the past three months.
-REITs are excluded.

The top 100 stocks meeting these requirements are included in the index. The index is weighed based on the indicated annual dividend yield with no stock comprising more then 10% of the index.
DVY has an expense ratio of .40%.
The Yield was 5.14% as of 6/30/2008.
Daily average volume for the ETF is 909,000 shares.

Here are the sector allocations and the top ten holdings for DVY.

Also I wanted to highlight the top yielding equities that are held in the ETF. I also wanted to break out the highest yielding non-financial holdings for everyone. These lists as well as the rest of the holdings could be used to find interesting stock ideas for individual stock investment. Please do your own research before investing in any of these stocks as extreamly high yields may be indications of troubled companies.

Hopefully you found this post interesting and informative. I plan to highlight other dividend or value ETFs in the future. Please let me know if there is any particular ETF that you are interested in or if there is any other information you would like included in the analysis. Have a great weekend.

Tuesday, July 29, 2008

Investors Business Daily Changes Outlook to Market in Confirmed Rally

Investors Business Daily (IBD) changed its market outlook from "Market in Correction" to "Market in Confirmed Rally" today. This change came after the large increase in the Dow and NASDAQ on higher then average volume.

IBD uses a combination of fundamental and technical analysis as well as market timing to identify stocks that they believe are attractive. IBD is geared more toward Traders. These Traders are looking to buy growth stocks and use more Momentum/Technical indicators to identify stocks to trade with. While this is not a method that I subscribe to, IBD has one of the better market timing indicators that I have found.

IBD watches the technicals and volume in the market to identify attractive times to purchase stocks. They do this by looking for large up moves in the market along with large volume. They believe that when large institutional investors are buying in the market they can be supportive to individual investors.

I'm not a huge fan of market timing. I think that the best way to make money in the long run is to do your homework, buy strong companies, and build a well diversified portfolio that includes many asset classes. Then you monitor your investments and liquidate the investments that no longer look attractive from a valuation standpoint or if there is a problem in the investment that will keep it from increasing in value over the long term.

I do believe that when you are looking to buy stocks it can be beneficial to look at some technical analysis though. Technical analysis can help you avoid falling knifes or value traps, two things that value investors must try to identify and avoid.

In conclusion, IBD has given the all clear to their readers that they can now invest in the market. This can add conviction to your buys but only after you do your own fundamental and technical analysis to identify quality companies that will increase your net worth over the long run.

Sunday, July 27, 2008

Recent Kiplinger Articles

I recently came across two excellent Kiplinger columns that have interesting commentary on dividend paying stocks, deep value plays, and income investments.

No Bite Left in the Dogs of the Dow? is an article that reviews stocks that are part of the Dogs of the Dow strategy. The article talks about why strategy has not worked this year mainly due to the large number of bank and deep value stocks that are part of the strategy. These two areas of investments have not been favored by the market this year.

The other article Investments that Pay You Every Month reviews several investments that pay dividends or income monthly. It goes into three different portfolio tactics based on the amount of risk you are willing to take and the amount of income you are looking for. Some of the investment types mentioned in the article are reality trusts, closed end mutual funds, REIT investments, and bond funds.

Both of these articles are very interesting reads and are important to understand for deep value and dividend investors.

Tuesday, July 22, 2008

Bank ETFs

There was another run up in financial stocks today even as more financial stocks missed earnings estimates. Wachovia Bank (WB) missed earnings by a wide margin, and said it was going to cut its dividend again. The market responded by driving WB up by more then 25% and with large gains in other financial stocks. I thought that I would take a look at some financial sector ETFs to review options to play a rebound in the financial sector through ETFs. Here are some of the options that I found.

Data from Morningstar and Yahoo Finance

There are a couple of ETFs that I would like to highlight. First VFH, this looks interesting because it has the lowest expense ratio as well as the largest number of holdings. I think that it is important to look for an ETF with many holdings because there are probably still some financial stocks with problems out there and some that may still go under. If you have an ETF with a large number of holdings then if a small number of financial stocks run into problems it will not have an out-sized affect on the portfolio and you will still be able to capitalize on the rebound in financial stocks if and when it happens. Second KBE, this concentrated portfolio looks interesting if you are not worried about potential financial landmines that may still be out there. KBE has the highest dividend yield at 6.2% as well as the largest losses for both YTD and 1Yr returns. This could give it the potential for the largest rebound and it pays you to stick around while you are waiting for that rebound.

Please remember financial stocks have been very volatile and that investing in any of these ETFs is a risky strategy. Also remember that you probably have exposure to the financial sector if you hold mutual funds or other ETFs that invest in the broad market so you could be significantly overweight in your portfolio if you invest in any of these ETFs. That said the market looks like it was expecting all the financial stocks to go under and since they look like they will not many of the financial stocks are rebounding. There has already been a large run up but after the punishment financials took on the way down there could still be a lot more upside. There could also be downside if it turns out that recent market action was a short term rally and the market decides that it was undeserved many financial stocks could plummet.

Friday, July 18, 2008

Relief Rally

It was a volatile week for the stock market accompanied by many large news stories. For starters the government has stepped up to back Freddie Mac (FRE) and Fannie May (FNM), the government sponsored entities that help supply liquidity to the mortgage market. The government also stepped in and took control of IndyMac Bank. Additionally, we saw several major financial institutions miss earnings estimates including Bank of New York Mellon (BK) which reported a profit of $.26/share when the street was expecting $.75/share, CIT Group (CIT) reported a $7.88/share loss compared to the $3.45/share loss the street was expecting, and Merrill Lynch (MER) which reported a loss of $4.95/share while expectations were for a loss of $1.91/share.

You would think with all of this negative news that the markets would have moved down in a big way but this was not the case. The Dow Jones Industrial Average gained 3.6% for the week, and the S&P 500 was up 1.7%. There were a couple of reasons for the gains. First, Oil dropped 11% on the week which hopefully will relieve some of the inflation pressers facing American consumers. Second, there were other banks that were able to beat earnings expectations. With all of the worry about the credit crunch, expectations for financial stocks were very low and there was fear on Wall Street. When some of the financial stocks reported their quarterly EPS were above estimates it triggered a large rebound in financial stocks. Here is a sample of the reporting financial institutions that beat average analysts estimates.

US Bancorp (USB) reported $.64/share vs. $.60/share expectations.
Wells Fargo (WFC) reported $.53/share vs. $.50/share expectations.
JP Morgan Chase (JPM) reported $.54/share vs. $.44/share expectations.
Citigroup (C) reported $-.49/share vs. $-.66/share expectations.

Wells Fargo also increased its dividend showing that management feels it has adequate capital to meet current and future requirements. It appears that all banks may not be going out of business as was worried. Expectations are still low and there may still be bank land mines out there but there was much relief in the market. I hope to look at some interesting financial ETFs this weekend. I hope you will come back to take a look with me.

Tuesday, July 15, 2008

Another One Bites The Dust

General Motors (GM) announced today that they would be suspending their dividend. This is yet another in the long line of companies that cut their dividends or stopped paying dividends completely. This stoppage is different, it is not in a financial stock hurt by the credit crisis but an auto manufacturer hurt by the rising commodity prices and problems in the domestic auto market. This cut makes me wonder how many dividend achievers and dividend aristocrats will be left at the end of this market cycle.

Dividend ETFs

This morning I was looking over some of the available ETFs that focus on dividend paying stocks. Given the dramatic drop and continued uncertainty in financial stocks, I thought it would be interesting to review each ETFs exposure to the financial sector. I also reviewed Yield, Expense Ratio, and Average Volume.

Information presented here is from Morningstar
It seems like there would be a couple of ways to play dividend ETFs in the current market. If you are risk adverse or believe that there is more trouble ahead for financial stocks the WisdomTree LargeCap Dividend Fund (DLN) and the Vanguard High Dividend Yield ETF (VYM) look interesting as they hold less then 30% financial shares and have yields around 3.5%. If on the other hand you feel that financial stocks have been oversold and expect a rebound then the Powershares High Yield Equity Dividend Achievers Portfolio (PEY) and the WisdomTree High-Yielding Equity Fund (DHS) look interesting due to their greater then 50% exposure to financial stocks and yields of 7.41% and 5.89% respectively. These ETF seem to have reasonable expense ratios and decent average volume. I hope to review some some of these ETFs in greater detail soon. Let me know if there are other Dividend ETFs out there that look interesting or if there are any of these ETFs you would like me to review in greater detail. Have a great day.