Morningstar Dividend Leaders Index

Recently a reader left a comment noting that I should consider First Trust Morningstar Dividend Leaders Index (FDL). My initial review of it was promising. Below is a description from Morningstar's FAQ web page:

The Morningstar Dividend Leaders Index captures the performance of the 100 highest yielding stocks that have a consistent record of dividend payment and have the ability to sustain their dividend payments. Stocks in the index are weighted in proportion to the total pool of dividends available to investors.

FDL began trading on 3/15/2006, thus does not have a lot of history. Below is its dividend history:

• 21-Dec-07 $ 0.263 Dividend
• 21-Sep-07 $ 0.220 Dividend
• 21-Jun-07 $ 0.200 Dividend
• 23-Mar-07 $ 0.200 Dividend
• 21-Dec-06 $ 0.200 Dividend
• 25-Sep-06 $ 0.200 Dividend
• 23-Jun-06 $ 0.200 Dividend

When comparing FDL to my ETF/closed-end income investments for the period of 3/15/2006 (when FLD began trading) to 2/23/2008, the performance ranking were as follows:

1. Vanguard Dividend Appreciation ETF (VIG)
2. Vanguard High Dividend Yield ETF (VYM) (11/16/2006)
3. Alpine's Total Dynamic Dividend Fund (AOD) (1/26/2007)
4. SPDR S&P Dividend ETF (SDY)
5. First Trust Morningstar Dividend Leaders Index (FDL)
6. Vanguard REIT ETF (VNQ)
7. Vanguard Financials ETF (VFH)

Note that VYM and AOD's inception date is after FDL's (shown in parenthesis). For these investments, the relative performace calculation is based on the comparative time-frame since their inception.

Based on back-testing through 12/31/2007, the Dividend Leaders Index underperformed the S&P 500 in the 1, 3 and 5 year periods, but the index outperformed the S&P 500 in the 10 year period. I was troubled to see just how far the Dividend Leaders Index underperformed the S&P in the 1 year period (-10.24% vs. 5.49%).

For now, FDL is one that I continue to evaluate from the sidelines.


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