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Summary DVY offers a solid dividend yield of 3.27%, but the real beauty goes much deeper. The holdings in the top 10 look excellent and reflect a great portfolio. The sector allocations are even better and include high allocations to sectors that are often ignored in high dividend yield ETFs. The iShares Select Dividend ETF (NYSEARCA: DVY ) looks great. After readers suggested I take a look at the portfolio, I decided it was time to dive inside and see what I could find. This is a great ETF. Investors may quibble on whether the allocations are perfect or merely good, but there is far more to like than to hold against the fund. Expense Ratio The expense ratio is .39%. That is by far the biggest challenge for the fund because the rest of the fund is simply great. Holdings Investors should always look to the holdings as part of the process in making the decisions. Who doesn’t like this allocation? We have Philip Morris International (NYSE: PM ) at the number 2 slot. That looks like a good dividend bet to me. I’m not a fan of their products, but I am I fan of the revenue and earnings they can generate with those products. That can be a tricky situation, but in the investment mindset I just can’t toss away the opportunity to have companies with highly addictive products. We see McDonald’s (NYSE: MCD ) at the number 4 slot. The case for McDonald’s is fairly similar. I don’t love the product that they were creating over the last several years, but I do love the way the restaurant leverages their real estate and enormous size to generate great economies of scale. We also have Kimberly Clark Corp (NYSE: KMB ) and Clorox (NYSE: CLX ) in the top ten. While I don’t cover these companies on an individual basis, it is encouraging to see three entries for consumer staples in the top holdings of the ETF. You look a little further down the list and you see Nextera Energy Inc. (NYSE: NEE ) leading a batch of three utilities. For comparison sake, I’ve often looked into defensive ETFs or high dividend yield ETFs and seen utilities only composing 0% to 5% of the portfolio. Since I like dividend ETFs to be stuffed with companies that can sell their product regardless of the economic environment, the utility sector is a great fit. Sector Allocations The next chart breaks down the sector allocations across the entire ETF and the choices are beautiful. I looked at this chart and knew I was going to like the ETF right away. Assuming proper diversification across individual companies, this is just a wonderful sector allocation. The utility sector comes in very heavy at 33% of the portfolio which is great for investors that care about getting strong sustainable dividends. I assume that is the only reason anyone is interested in this ETF. The dividend yield is currently running 3.27% and I’d be fairly confident in that dividend being maintained and growing over time. Consumer Staples Besides utilities, I’m very fond of the consumer staples sector since these are companies that are designed to whether the downturn in the economy. The products they sell can hold up remarkably well during down economies and it is the presence of reliable sales that helps a company survive the hard times. Between the consumer staples and utilities sector we have almost 45% of the portfolio. Information Technology This is a really shocking one for me. The allocation here is only 1.51%. For many dividend focused ETFs an allocation that larger or larger is given to Microsoft (NASDAQ: MSFT ) alone. On the other hand, MSFT currently only yields around 2.67% so I can see the smaller allocations. Broad market ETFs tend to be fairly heavy on information technology, so I’m just fine with seeing a lower weight for a dividend focused ETF. Investors using the iShares Select Dividend ETF as one part of their portfolio should be able to benefit from the diversification advantages of the different sector weights. What to Add I don’t like to be heavily overweight on information technology, but if an investor is using this as the core of the portfolio then I think it would be wise to use a small allocation to a broad market ETF or a very small allocation specifically to the information technology sector. The other place that I would consider adding a bit is the health care industry. There is plenty of demand for their goods and services from the baby boomer population. If an investor happens to be a baby boomer and plan to retire on the dividends, it would be nice to own part of the company that makes the medication they will want. If prices go up and profits soar, those investors should see higher dividends to offset the higher costs they are facing in their daily lives. I wouldn’t mind adding a little bit more exposure on consumer staples either, but that can be considered a personal preference thing. I would love to see this allocation running closer to 20% which would lead to utilities and consumer staples exceeding 50% of the portfolio when combined. That sounds like a nice secure dividend to me. Conclusion The expense ratio is a bit high for my taste, but the portfolio is beautiful. From the individual companies selected to the sector allocations, there is far more to like about this portfolio than to dislike. I think some investors putting in new money might seek ways to replicate the portfolio through a combination of lower fee ETFs, but it is a testament to the design of the ETF that it would be worth looking into those strategies. If the expense ratio dropped down to around .10% to .14%, it would come in as a solid 10/10. Scalper1 News
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