Dividend growth investors often complain that there is no real dividend growth ETF (Exchange Traded Fund) available.
There are lots of “dividend” ETFs, but most of them fail to hit the mark as good dividend growth vehicles for a variety of reasons:
• They cost too much
• They don’t increase dividends regularly
• They don’t always emphasize quality companies that have demonstrated a strong commitment to rising dividends
• They emphasize total return and all but ignore income optimization
• They don’t react promptly to important dividend developments
• They must buy and sell in reaction to cash inflows and outflows from investors
So instead of the smooth dividend growth that we receive from typical dividend growth stocks, such as Johnson & Johnson (JNJ), we get a saw-tooth dividend path, and sometimes annual cuts, from many dividend ETFs.
In the following graph, for example, compare JNJ’s consistent dividend growth to the frequent changes from VIG, the Vanguard Dividend Appreciation ETF. VIG is the largest dividend ETF in the world (it has the most assets).
Not only is VIG’s dividend progress uneven, its yield is only about 2.2%. JNJ’s yield, by comparison, is about 2.8%. Low yields are typical of dividend ETFs.
We know that dividend growth investors have a variety of goals and are not a monolithic market for a one-size-fits-all dividend growth ETF.
Nevertheless, I have been thinking for a long time about a generalized dividend growth ETF – the kind that would be suitable for someone just getting started, or for someone who wants to back away from the time and effort required to sift through individual stocks, make portfolio management decisions, and so on.
So, the purpose of this article, and others to follow, is to develop such an ETF.
Now it won’t really be a true exchange traded fund, of course.
But we can use Motif Investing to build a simulated one that will be fully investable for anyone.
What is a motif? It is a portfolio.
A motif is a basket of up to 30 stocks or ETFs intelligently weighted to reflect an investment theme, market insight or innovative trend. Choose from one of our professionally built motifs, customize, or design your own. Then buy your motif in just one click.
So here is what we will do: Build a basket of up to 30 stocks to reflect a broad, basic approach to dividend growth investing.
The plan is that over the next few weeks, we will plan the motif and select stocks that fit the plan. When that process is completed, I will finish the motif portfolio at Motif Investing. At that time, it will become available to the investing public, including all of you.
I have already begun to establish the framework for this “ETF.” As we work our way through the construction process, I will apply Dividend Growth Investing Lessons to stay on track with good practices.
To populate the motif with stocks, I will consult a variety of sources to help identify the top dividend growth stocks. I will establish a scoring system to rank them all.
The goal is to have a portfolio of reliable, high-quality, dividend growth companies, with a decent yield, annual dividend increases, and a total return that is competitive with the market as a whole.
The intent is to “go live” with the motif portfolio on January 1, 2017. From that point forward, Motif Investing will track its performance, which you can easily see online. The information will be public. You do not have to invest in the portfolio to track it.
I will supplement Motif’s tracking with articles that emphasize its income performance. Unfortunately, Motif is like the fund companies in that they only focus on total returns when they discuss performance. We need to supplement that for our own purposes.
Prior to January 1, we must answer questions such as:
• What should a “general dividend growth ETF” look like?
• What are its goals?
• What is its business plan?
• What stocks should it contain?
• How should we balance yields with dividend growth rates?
• How should it be described on the Motif site to potential investors?
• What role will valuation play? Since the portfolio will be introduced all at once, we may need to accept some overvalued stocks in order to complete the motif. How much will we need to compromise valuation to get the finest companies?
The way Motif works, anyone can alter a motif to suit themselves. If you purchase an existing portfolio (motif), you can make your own changes to it, personalize it. You can’t do that with a mutual fund or ETF. That is one of the nice features of Motif Investing.
As I said above, I have begun the framework for this DG “ETF.” Here is a screen shot of this nascent portfolio:
It won’t be finished until I click a button that says to finish it. It has not been populated with stocks yet, and you cannot access it yet on Motif. You will be able to access it when I finish building it.
As I said earlier, my target date for completion is the end of the year. If you are interested in investing in it, or making changes to it for your own purposes, you will have that opportunity as soon as the markets open in 2017.
I have been thinking about this project for a long time, so I already have some answers (or near-answers) to many of the questions posed earlier.
But I would also like to hear your ideas. If you would like to give me some input, please email the editors at DailyTradeAlert (DTA@DailyTradeAlert.com). Let them know your thoughts, and they will pass them along to me. I can’t promise that I will respond to every email, but the editors will get back to you and acknowledge every one.
In the next article, we will begin to explore goals and create a business plan. We’ll also start to articulate how stocks will be selected.
I hope you enjoy this process. Please participate in it by sending your thoughts to the editors at DailyTradeAlert.
If all goes well, on January 1, 2017, we will have created what the fund companies have not: An inexpensive, real, dividend growth portfolio suitable for any investor just getting started with dividend growth investing, or who does not want to devote as much time to researching and building this kind of portfolio.
I intend to invest in the motif myself, so I will have skin in this game.
— Dave Van Knapp
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