The Red Carpet for Dividend Aristocrats

Standard & Poor's Dividend Aristocrats are getting the royal treatment.

State Street Global Advisors is introducing the SPDR Dividend ETF, a new exchange-traded fund that seeks to replicate the price and yield, before expenses, of Standard & Poor's High Yield Dividend Aristocrats Index.

The Aristocrats Index comprises the 50 highest dividend-yielding constituents of the S&P Composite 1500 Index that have increased their annual dividends every year for the past 25 years. This universe currently includes only 85 stocks.

Holdings in the Aristocrats Index, as well as in the ETF, are weighted according to dividend yield, and will be reweighted every quarter. Companies must have a market cap of at least $500 million. As a risk-control measure, no individual holding can represent more than 4.0% of total assets at the time of rebalancing.

The ETF will trade under the ticker symbol SDY starting on November 15, and will have a 0.30% expense ratio, the lowest among dividend-oriented ETFs to date.

"This is an income-oriented index," said Srikant Dash, index strategist at Standard & Poor's. "It is appropriate for investors seeking steady, high-quality income. This Aristocrats Index has delivered yields ranging between 3% and 4% over the last five years, and currently is at about 3.3%." The S&P 500 Index, by comparison, currently has a yield of about 2%.

Dash also said that unlike most dividend-oriented portfolios, this ETF is more diversified by industry and sector. He noted that most dividend ETFs typically have very heavy weightings (up to 80%) in just two sectors, financials and utilities, raising interest rate and sector-specific risks.

As of Sept. 30, 2005, the Aristocrats Index had a 26% weighting in financials, and 20% in utilities, or 46% in total. In comparison, another dividend-based index, the Mergent Dividend Achievers Index had an 84% allocation to these two sectors, while the Dow Jones Select Dividend Index kept 60% in them. Dash also said that the Aristocrats Index includes both "growth" and "value" oriented stocks, in contrast with other vehicles that either focus purely on yield or purely on capital.

The Aristocrats Index gained 14.6% (annualized) for the five-year period through September 30, versus a 1.5% drop for the S&P 500, while displaying less volatility and less risk.

The Comfort of Dividends

According to Standard & Poor's research, dividends have contributed nearly one-third of total equity return since 1926, with capital appreciation providing the other two-thirds. Consistent dividend-payers typically comprise high-quality companies with high credit ratings.

The environment for dividend payers will likely get even better. Standard & Poor expects cash dividends paid by companies in the S&P 500 Index to set another record in 2005, paying out $21.85 per share, versus $19.44 in 2004. That 12.4% increase in dividend payments translates into a $203 billion aggregate payment for S&P 500 companies in 2005.

"Dividend issues are less volatile than those that don't pay dividends," explains Howard Silverblatt, market analyst at Standard & Poor's. "During bull markets, paying issues tend to rise less, and during bear markets they decline to a smaller degree. The dividend acts very similar to an anchor by stabilizing the stock during periods of market volatility."

Fund Advisor identified five existing dividend-focused ETFs, including three launched in September by PowerShares Capital Management. In addition, Vanguard plans to introduce the Vanguard Dividend Achievers Index Fund, which will be based on the Mergent Dividend Achievers Select Index.

Summary of Existing Dividend ETFs:

iShares Dow Jones Select Dividend Index Fund (DVY)
UNDERLYING INDEX: Dow Jones Select Dividend Index (comprised of the 100 highest dividend-yielding securities, excluding REITs, in the Dow Jones U.S. Total Market Index).
WEIGHTING: Yield-weighted
NET ASSETS: $7.3 billion
NO. OF HOLDINGS: 100
INCEPTION: 11/3/2003
TOP SECTORS: banks, 33.4%; electricity, 14.7% (11/4/05)
EXPENSE RATIO: 0.40%
DIVIDEND YIELD: 2.75% (after expenses)
PowerShares High Growth Rate Dividend Achievers Portfolio (PHJ)
UNDERLYING INDEX: Mergent High Growth Rate Dividend Achievers Index (U.S. stocks which have raised annual dividends for the last 10 or more consecutive years, and delivered the highest dividend growth rates).
WEIGHTING: Modified market-cap weighting. No individual holding can represent more than 4%.
NET ASSETS: $27 million
NO. OF HOLDINGS: 100
INCEPTION: 9/15/05
TOP SECTORS: financials, 50.2%; health care, 14.2% (11/6/05)
EXPENSE RATIO: 0.50%
DIVIDEND YIELD: 1.46% (after expenses)
PowerShares High Yield Equity Dividend Achievers Portfolio (PEY)
UNDERLYING INDEX: Mergent Dividend Achievers 50 Index (the 50-highest yielding companies which have raised their annual dividend for 10 or more consecutive years).
WEIGHTING: Yield-weighted
NET ASSETS: $467 million
NO. OF HOLDINGS: 50
INCEPTION: 12/9/04
TOP SECTORS: financials, 52.5%; utilities, 32.2% (11/6/05)
EXPENSE RATIO: 0.50%
DIVIDEND YIELD: 3.72% (after expenses)
PowerShares Dividend Achievers Portfolio (PFM)
UNDERLYING INDEX: Mergent Broad Dividend Achievers Index (U.S. stocks which have increased annual dividends for the last 10 or more consecutive years).
WEIGHTING: Modified market-cap weighting. No individual holding can represent more than 4%.
NET ASSETS: $26.4 million
NO. OF HOLDINGS: 313
INCEPTION: 9/15/05
TOP SECTORS: financials, 32.6%, consumer staples, 19.9% (11/6/05)
EXPENSE RATIO: 0.50%
DIVIDEND YIELD: 2.00% (after expenses)
PowerShares International Dividend Achievers Portfolio (PID)
UNDERLYING INDEX: International Dividend Achievers Index (foreign stocks which trade as ADRs and have increased annual dividends payments for the last 5 or more consecutive years.).
WEIGHTING: Yield-weighted
NET ASSETS: $54.3 million
NO. OF HOLDINGS: 42
INCEPTION: 9/15/05
TOP SECTORS: financials, 32.0%, banks, 15.0%; utilities, 10.6% (11/6/05)
EXPENSE RATIO: 0.50%
DIVIDEND YIELD: 2.55% (after expenses)

Contact Bob Keane with questions or comments at: bkeane@investmentadvisor.com.

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