PEY & DVY: For Dividend

Barclays Global Investors (BGI) is a big powerhouse in the business of Exchange Traded Funds (ETFs). In November 2003 they launched an ETF : "DVY". Its performance benchmark is the Dow Jones Select Dividend Index which invests in 50 of the highest dividend paying stocks (non-REIT) in the Dow Jones U.S. Total Market Index. DVY does not invest in REITs (real estate investment trusts), because of the unpredictable nature of their dividend distributions.

A company can be considered for the index if it has been paying dividends for five years and has a high payout ratio (dividends in relation to earnings). The reduction of tax (to only 15%) on dividend income by Bush administration fuelled a strong growth and popularity of this ETF among both individual and institutional investors. In our past postings we discussed another such ETF: "PEY", PowerShares High Yield Equity Dividend Achievers Portfolio. PEY seeks investment results that, before expenses, generally correspond to the price and yield performance of the Mergent Dividend Achievers 50 Index. The Index is comprised of the 50 highest yielding companies with at least 10 years of consecutive dividend increases.

The Wheaton, Illinois-based PowerShares is rather a new player in ETF world but this year they have launched quite a number of new ETFs (Many of our past postings discussed their products). PowerShares' PEY could produce a higher yield, although with 50 stocks in its portfolio, it has more risk from less diversification as compared to 100-stocks' portfolio of DVY. Another difference in investment strategy is: PEY weights stocks by dividend yield, whereas DVY allocates its assets among stocks based on the absolute size of the dividend.