As bonds struggle, investors hunt for income. But not all ETFs are created equal
Dividend investing never goes out of style. Over the past 100 years, dividends have accounted for some 47 percent of the
Lately, investors are combining their hunger for yield (paltry bond and some equity yields continue to disappoint) with the popularity of exchange-traded funds (ETFs). The category they're increasingly tapping includes dividend ETFs and specialized high-dividend ETFs.
"Beyond individual securities, investments in equity ETFs [that] have stocks that pay high dividend yields emerged as a source of decent income for investors at this time," said analysts at
Market uncertainty leads to increased inflow to dividend ETFs, which can help boost their return. But investors should be paying attention to consistency in dividend payment and the financial strength of the companies paying the dividends.
Better than other income sources?"While dividend-focused ETFs may be safer than other equity funds, they are by no means risk-free," the
Do investors get any more value with dividend ETFs or are straight-up dividend-paying stocks the way to go?
ETFs can bring simplified diversification to balanced portfolios. As with any ETF, investors are wise to compare expenses of any one fund to the broader category. Investors must do their homework. It's not enough to find "dividend" in the title and jump.
For instance, "contrary to its name, Vanguard High Dividend Yield Index ETF (VYM) has historically yielded only about 1 percentage point more than the
Beyond cost, some critics of dividend-concentrated ETFs argue that they can be too restricted to certain sectors, ignoring others. They may, for instance, be underweight in technology and energy shares. Proponents largely say, so what? If the goal is dividend yield, it may matter far less what types of companies are generating that payout.
Keep in mind that companies typically pay dividends when they don't need to reinvest the cash. Businesses in higher-growth industries will use that cash to expand the company. Investors looking for energy-sector yield may opt for income-generating ETFs that are more specialized. Guggenheim Multi-Asset Income ETF (CVY), for instance, tracks the Zack's Multi-Asset Income Index. It is currently energy-focused and includes
More to choose from.Investor demand for dividend ETFs brought Russell Investments to the table with two new high-dividend ETFs earlier in March. Their release offers investors a snapshot of the characteristics that go into stock-picking for these funds. It's a good primer for dividend ETFs in general.
The company designed the Russell High-Dividend Yield ETF (HDIV) and Russell Small-Cap High Dividend Yield ETF (DIVS) to replicate the performance of the U.S. Large Cap High Dividend Yield and Russell U.S. Small Cap High Dividend Yield indexes, respectively. Fund metrics aim to uncover companies that have the capacity to pay out more in dividends and grow their current payouts, while still having strong earnings. They measure the cash flow generation capacity of the company, return on equity, and expectations for future earnings.
By using this method, Russell looks to bring greater transparency to the stock selection approach while avoiding some of the pitfalls that hit many other products in the space, they said. For example, many other funds concentrate solely on high yields without any scrutiny on financial strength, a situation that can lead to trouble if payouts start to become in danger, they said.
A few other dividend ETFs to consider:
Vanguard Dividend Appreciation Index (VIG) tracks companies that have grown their dividends for 10 consecutive years. At nearly
SPDR S&P Dividend (SDY). Quality and distressed companies combine in this fund's 60 highest-yielding stocks of the
PowerShares Dividend Achievers Portfolio (PFM)is linked to the popular Broad Dividend Achievers Index, which focuses on companies that have increased their annual dividend for 10 or more consecutive years. Top holdings include
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