Stock ETFs for Income

Low yields on Treasuries and high-quality bonds are pushing income investors to take on more risk. Even with a recent rise in yields, the yield on 10-year Treasuries is still only about 1.8% and that just isn't getting the job done for some. One area where people are looking for yield is dividend-paying stocks, and a popular way to own stocks is through exchange-traded funds or ETFs.

The website ETFdb lists 52 funds with a dividend investment style. This review will profile five funds with dividend growth as one criterion for the indexes they track. Four of the funds focus on U.S. companies, while one looks outside the U.S.

Fund

Index Tracked

Current Yield

Expense Ratio

Vanguard Dividend Appreciation (NYSE: VIG  ) Dividend Achievers Select Index 2.1% 0.13%
iShares Dow Jones Select Dividend Index (NYSE: DVY  ) Dow Jones U.S. Select Dividend Index 3.4% 0.4%
SPDR S&P Dividend (NYSE: SDY  ) S&P High Yield Dividend Aristocrats 3.2% 0.36%
PowerShares Intl Dividend Achievers (NYSE: PID  ) International Dividend Achievers Index 3.5% 0.55%
PowerShares Dividend Achievers (NYSE: PFM  ) Broad Dividend Achievers Index 2.2% 0.6%

Source: Fund managers' websites and Yahoo! Finance.

The yields on these funds all top 10-year Treasuries, and most of them give long-term, high-grade corporate bond yields a good run. In addition, the indexes they track offer a solid potential for regular increases in the payout from the stocks these funds hold.

Solid potential for increases is fine, but have the funds met that potential? In general, the history isn't too bad. Despite dips in payouts during the financial crisis in 2008-09, the funds have seen their dividends bounce off their worst levels in recent years.

Source: Fund managers' websites and author's calculation. *The 07-08 payout for the SPDR S&P Dividend fund included capital gains distributions; all other payouts are income.

I'm a big fan of dividend growth investing and am making an outperform CAPScall on the Vanguard Dividend Appreciation fund. Even though it has the lowest current yield of these five funds, it's been the most successful at raising payouts and has the lowest expense ratio.

Shifting from bonds to stocks or stock-based funds for income doesn't come without risk.  Investors considering the move should have a long time horizon and take a good look at price charts that cover 2008-2009. They aren't pretty. That said, dividend checks spend just as well as bond coupon payments and can work out well for investors who understand and can accept the risks of owning stocks.

Fool contributor Russ Krull has no position in any fund mentioned.  You can follow his stock picks here.

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  • Report this Comment On August 20, 2012, at 7:39 PM, fool3090 wrote:

    Be sure to look at the top holdings (and sectors) of each fund! There are important differences in each. For instance, compare VIG vs. SDY. Both have a top sector of Consumer Defensive at 27.50% and 20.20% respectively (that's a big diff.) The top-holdings sector is Industrials, with 24.3% for VIG and 19.10% for SDY. In third place for holdings is Consumer Cyclical for VIG at 12.18% -- in the case of SDY, however, it's Financial Services at 13.86%. Again, a big, big difference. By the way, VIG has only 6.13% in Financial Service and almost none in Telecom. SDY has no exposure in the Technology sector.

    What does it all mean. Do your homework. (Disclosure: I'm long on VIG). I was overweighted in Financial and Telecom. I wanted a solid divvy with room for growth. VIG fit the profile perfectly. But that was for me, and might not be the answer for your own situation.

    One last thing. Look at the chart and see the drop in payments... SDY and DVY fell the most. So if you are looking for boring, steady-she-goes kind of ETFs, these might not be for you, given their response to the financial crisis. VIG held and then increased, which is what I wanted: a core holding with growth potential. So it's distribution isn't as big as its competitors, I think it's a better holding overall and over the long-term when you look at total return, not just percentage of distribution payments. My two cents.

  • Report this Comment On August 20, 2012, at 8:37 PM, rd80 wrote:

    fool3090,

    Many thanks for the additional information.

    One reason SDY's payment drop is so big is the 07-08 time period included cap gains.

    Best regards, Russ

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