I’ve been to Las Vegas, but only because our son and his family lived there at one time. Las Vegas is popular because of greed – an intense selfish desire for wealth. Greed often causes us to do things that are irrational and stupid. The allure of Vegas is a get-rich-quick with very little work. Most fly or drive away from the casinos poorer and not wiser.
There is a biblical principle that many ignore when it comes to investing. I’ve mentioned it before, but it is worth repeating in the context of today’s post. Proverbs 13:11 (ESV) says: “Wealth gained hastily will dwindle, but whoever gathers little by little will increase it.”
Many investments pay a dividend. The dividend is usually quarterly, but it can be monthly, annual or semi-annual. There are also “special” one-time dividends declared from time-to-time by some companies. Dividend investments can be foundational in a good portfolio of companies and ETF funds. When researching a company, there are always four dividend questions I ask about the investment. These are easily found at the Fidelity Investment’s web site. The four questions are:
- Does the company (ETF) pay a dividend, and what is the yield if it does?
- Is the dividend increasing over time? At what rate?
- What is the payout ratio? Do earnings support the dividend?
- Has the company ever reduced the dividend, especially during a recession (2008)?
DVY and DGRO ETFs – For ETFs that pay a dividend, it is called a “distribution.” Because most ETF investments have many different companies in their mix, the yield is the combination of those companies and the growth and earnings are the sum of those companies’ results. This first image shows ETF DVY, which is the iShares Select Dividend ETF. This ETF includes companies like McDonald’s, Chevron, Kimberly Clark and Lockheed Martin. DVY has a heavy weighting in utility, consumer discretionary and financial stocks. This is not surprising, as the goal of this fund is dividend income. Another dividend ETF is DGRO. DGRO is the iShares Core Dividend Growth ETF. Because DGRO focuses on growth, the heaviest sectors are Information Technology, Financials and Health Care.
Yield and Diluted Dividends – Be careful. The yield on these two ETFs is quite different. DGRO’s yield currently is 2.13% while DVY’s is 3.04%. But that isn’t the total story. DVY’s expense ratio is 0.39%, which is higher than DGRO’s expense ratio of 0.08%. In other words, both have a diluted dividend because you are paying iShares to manage the dividend companies they select for you. You pay them and lose some of your dividends.
For stocks, you never give away any of your dividend – it is not diluted. Take Apple (AAPL) as an example. The yield is currently 1.62% (MRD – based on the Most Recent Distribution!) The MRD was $0.63 per share, so the annualized MRD is $2.52 per share. The TTM (trailing twelve months) number is not as meaningful if the dividend is not reduced in subsequent quarters.
Let’s answer my four questions and look at Apple’s results:
- Does AAPL pay a dividend, and what is the yield if it does? YES, 1.62%
- Is the dividend increasing over time? At what rate? YES, 10.72% (5 years)
- What is the payout ratio? Do earnings support the dividend? 60% – YES! Earnings exceed the current dividend payout.
- Has the company ever reduced the dividend, especially during a recession (2008)? No, AAPL has never reduced the dividend. AAPL’s first dividend was paid in Q3 of 2012 and it was $ 0.378571 per share. This information is available on the “Dividends Detail” section if you look at this online.
Conclusion: Consider adding AAPL as an undiluted dividend growth technology sector investment. It meets my requirements. DVY & DGRO are also possibilities. Take a look at VYM as well. Does VYM meet my requirements?