A Look At Dividend Appreciation Index

One of the funds that I am invested in is the Vanguard Dividend Appreciation ETF (VIG). It has stocks in the NASDAQ US Dividend Achievers Select Index. The index has the symbol DVG, although you cannot trade the index directly. There is no stock or ETF with the symbol DVG.

All of the dividend indexes are sub-indexes of general global or national stock indexes. They have a lot of rules about what happens when there is a stock split, or a merger, and how often the stocks are rebalanced. I am not going to go into too much detail about any of those rules since they are generally the same, and not too relevant. There are also a lot of rules about how the daily prices of the indexes are calculated.

The NASDAQ US Dividend Achievers Select Index is a subset of stocks that are in the NASDAQ US Broad Dividend Achievers Index (DAA). The NASDAQ US Broad Dividend Achievers Index itself is a subset of the NASDAQ US Benchmark Index (NQUSB).

As far as I can tell, the NASDAQ US Benchmark Index (NQUSB) is covered in the document “NASDAQ Global Index Family Methodology” (go to https://indexes.nasdaqomx.com/Resource/Index/Methodology and search for “Global”).

Section 2 gives the basic criteria:

  • Must be listed on an Index Eligible Stock Exchange (section 2.2.1). Generally, an exchange is eligible if it does not put too many restrictions on foreign ownership.
  • Must be an eligible security type (section 2.2.2). Common shares are eligible, as are preferred shares, REITs and depository receipts. Generally, ETFs, preferred shares, closed-end funds, limited partnerships, limited liability companies and pass-through entities are not eligible.
  • Must have a minimum worldwide market capitalization of $US 150 million (section 2.2.3)
  • Must have a minimum three-month average daily dollar trading volume of $US 100 thousand (section 2.2.4)
  • Must have a minimum free float of 20% (or in some cases 5%) (section 2.2.5)
  • Must have “seasoned” for at least three months on an eligible stock exchange (section 2.2.6)
  • Must be in a country classified as Developed or Emerging (sections 3.1 and 3.2)
  • Must not be issued by an issuer currently in bankruptcy proceedings (section 6.2.1). I guess in some countries a bankrupt company can still be traded; I am pretty sure in the USA bankrupt companies are delisted.

So I guess the NASDAQ US Benchmark Index (NQUSB) has stocks that are eligible to be in the NASDAQ Global indexes and trade on US exchanges.

The NASDAQ US Broad Dividend Achievers Index (DAA) is comprised of US accepted securities with at least ten consecutive years of increasing annual regular dividend payments. Index eligibility is limited to specific security types only. The security types eligible for the Index include common stocks, limited partnership interests, shares or units of beneficial interest and shares of limited liability companies.

To be eligible for inclusion in the Index a security must meet the following criteria:
– be included in the NASDAQ US Benchmark Index (NQUSB) except for limited partnerships;
– limited partnerships must be listed on the Nasdaq Stock Market® (Nasdaq®), the New York Stock Exchange, NYSE American, or the CBOE Exchange;
– have a minimum three-month average daily dollar trading volume of $1 million;
– have at least ten consecutive years of increasing annual regular dividends based on ex-date;
– one security per issuer is permitted. If an issuer has multiple securities, the security with the highest three-month average daily dollar trading volume will be selected for possible inclusion into the Index;
– may not have entered into a definitive agreement or other arrangement which would likely result in the security no longer being Index eligible; and
– may not be issued by an issuer currently in bankruptcy proceedings.

The NASDAQ US Dividend Achievers Select Index (DVG) is comprised of a select group of securities with at least ten consecutive years of increasing annual regular dividend payments. DVG only includes common stocks.

To be eligible for inclusion in the Index a security must meet the following criteria:
– be included in the NASDAQ US Broad Dividend Achievers Index (DAA) excluding limited partnerships and REITs; and
– additional proprietary eligibility are applied.

So it is interesting that limited partnerships are not in the general US index, allowed in the DAA, and excluded again in the DVG.

One thing that really bugs me about DVG is the “additional proprietary eligibility” criteria. What are the additional proprietary criteria? Am I wrong to get hung up on this? I would like to know how my golden years are going to be funded. But they won’t tell me. Besides, “proprietary criteria” sounds like active management, not indexing.

I have downloaded the holdings for the indexes, and DAA has oil and gas companies and more utilities; DVG has one oil company and a few utilities companies. For telecom, DAA has AT&T, Inc., Telephone & Data Systems, Inc and Verizon Communications, Inc., while DVG only has Telephone & Data Systems, Inc. Lots of profitable stuff is not in DVG, and I think it is due to the mysterious “additional proprietary eligibility”.

You can only download this information from the NASDAQ site during standard business hours. I would prefer being able to get this info 24/7, since I am at work during standard business hours. You can get the annual reports for the ETFs anytime.

So between the lack of information about the holdings from NASDAQ, the lack of a few profitable companies and industries from DVG and the “additional proprietary eligibility”, I am starting to sour on DVG. I will look at other indexes. I like the fact that Vanguard has super-low cost, but I don’t like getting a low-cost black box. I really do not like the “additional proprietary eligibility” part. If I wanted that, I would go with an actively managed product. Maybe all the good indexes were taken by the time Vanguard decided to make some dividend growth ETFs.

Some of the material in this post was taken from material for the NASDAQ indexes. Some of the terms used in this post are NASDAQ trademarks. Generally any phrase with the word “NASDAQ” in it.

Big Jim likes his indexes to be transparent.

The Immaculate Conception” by Giovanni Battista Tiepolo (March 5, 1696 – March 27, 1770), assumed allowed under Fair Use.

Post created on 2019-04-22_2:02:50, last modified on 2019-12-01_14:41:33

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