New Exchange-Traded Fund for Dividends

Aficionados of index funds are probably aware of "exchange-traded funds" (ETFs), which are stock-like beasts typically based on indexes. The best-known ETFs are probably "Spiders," properly known as Standard & Poor's Depositary Receipts (AMEX:SPY), or SPDRs. They're essentially small versions of an S&P 500 index fund, which you can buy and sell in small amounts. Spiders have recently been trading for around $115 per share. (Learn more about ETFs before investing in them -- perhaps start with this Bill Mann article.)

There are now many ETFs out there, based on large-cap and small-cap indexes, industries such as utilities, and other market niches. A new kid on the block, though, is the iSharesDow Jones Select Dividend Index Fund (NYSE:DVY). Just a few months old, DVYs sport the 50 of our stock market's highest dividend-yielding, non-REIT companies. Stocks in the index also feature a positive dividend-per-share growth rate and an average dividend payout percentage rate less than or equal to 60% of earnings over the past five years.

The index's components get reviewed and rebalanced yearly, and they're weighted according to their dividend, not to their market value or price. One reason that DVYs will be of great interest to many investors is recent legislation that reduced the tax rate on dividends to 5% or 15%, depending on your tax bracket. Another reason to like DVYs and many other ETFs is that they often sport lower fees than their fund counterparts. While the average stock dividend mutual fund has an expense ratio of 1.40% (according to Morningstar), DVYs only charge 0.40%, a marked difference.

If you're looking for some very promising stocks that yield, on average, 5.04% , take a free trial of our new newsletter, Motley Fool Income Investor . (Yield numbers are as of 2/11/2004)