If you want to be prepared for whatever the future may bring, you owe it to yourself to invest in stocks that pay dividends.
Dividend-paying stocks are offering a unique two-sided opportunity right now. Not only can they help protect you from a double-dip recession, but many of them are still priced at such bargain levels that their yields are still well above their historical averages.
The big question is what's the best way to find the strong dividend stocks you want. Do you need to do your own research, or can you simply rely on investing experts to do all your work for you?
Specialty dividend ETFs
Today, more investors than ever rely on exchange-traded funds to simplify their portfolios. In addition to giving you access to a huge array of assets from around the world, ETFs also let you drill down on certain market segments using different strategies.
One particular strategy that caught on in a hurry was the dividend-focused ETF. After several years of competition, here are four ETFs that have established niches for themselves and collected enough assets to make them viable for the foreseeable future:
- The iShares Dow Jones Select Dividend Index ETF (DVY) has over $3 billion in net assets. The index it tracks chooses 100 stocks that have certain characteristics, including healthy dividend growth rates, sustainable payout ratios, and substantial dividend yields. Its current top holdings include Eastman Chemical and Centurytel (NYSE:CTL).
- The Vanguard Dividend Appreciation ETF (VIG), with about $1.2 billion under management, tracks an index of stocks that have historically raised their dividends consistently over time. Its holdings include well-known names like Wells Fargo (NYSE:WFC), IBM (NYSE:IBM), and Coca-Cola (NYSE:KO), along with other actively traded blue-chip stocks.
- The SPDR S&P Dividend ETF (SDY) tracks S&P's High Yield Dividend Aristocrats index, which identifies top-yielding stocks that have at least a 25-year history of annual dividend increases. The index is designed to give broader diversification across sectors, potentially avoiding the sector concentration in financials and utilities that left many dividend investors reeling during last year's financial crisis. The ETF has about $800 million under management, with the biggest holdings being Integrys Energy Group and Black Hills.
- WisdomTree LargeCap Dividend ETF (DLN), with roughly $380 million in assets, tracks an index with a twist. The index takes the 300 biggest companies from a broader index of dividend-paying stocks, but it then weights those stocks by the value of their dividends rather than their market cap. Despite that fact, top names like General Electric (NYSE:GE), Bank of America (NYSE:BAC), and AT&T (NYSE:T) dominate the ETF's top holdings, with dividend-cutters GE and B of A remaining in the top spots only because the weightings are changed just once each year.
So how have all of these ETFs performed? Let's take a look at their returns.
|
Dividend ETF |
YTD Return |
1-Year Return |
3-Year Avg. Annualized Return |
|---|---|---|---|
|
iShares |
(3.6%) |
(23.7%) |
(12.6%) |
|
Vanguard |
5.9% |
(17.8%) |
(3.9%) |
|
SPDR |
4.7% |
(11.4%) |
(6.6%) |
|
WisdomTree |
3.6% |
(22.5%) |
(8.8%) |
Source: Morningstar.
Which to pick
In comparing all four funds, it's interesting that the largest one, the iShares fund, has also performed the worst over all three periods. The Vanguard and SPDR funds, on the other hand, seem to have done better by focusing more on consistent dividend increases rather than the magnitude of dividend growth over the years.
WisdomTree prides itself on fundamentally weighted indexes like the one its dividend ETF follows, but so far, the fund hasn't distinguished itself among its peers. One reason may be that dividend weighting matches market capitalization fairly closely -- a stock that supports a $100 billion market cap will be in a better position to pay more out in dividends than a $10 billion stock.
For my money, the Vanguard dividend ETF looks the best for most investors who just want a solid dividend ETF. In addition to having good performance, it also clocks in with the lowest annual expense ratio of the four at 0.24%.
Go with dividends
Lately, trying to pick individual dividend stocks has been a risky proposition. Choosing a solid dividend ETF can help you diversify your portfolio while giving you the benefits that dividend-payers offer.
Everybody likes a fund with big returns, but Foolish fund expert Amanda Kish thinks you need to steer clear of these top performers. Find out why in this article.
