Yield-hungry investors have a full menu of choices among exchange-traded funds that invest in dividend-paying stocks. But just as an abundance of tempting entrees at a smorgasbord can leave you paralyzed with indecision, too many investment options can also be a bad thing.
You can narrow your choices by looking for funds that offer more than just a fat dividend yield (that's the amount a company pays out compared with its stock price). After all, the stocks with the highest yields tend to be associated with the shakiest companies -- the ones that may be ill-equipped to keep paying in a downturn.
And a disproportionate chunk of the market's top yielders tend to reside in the financial sector, which was the epicenter of the 2007-09 stock market conflagration. Because ETFs track indexes rather than relying on active managers to pick securities, it's important to choose a dividend ETF that has some safeguards against loading up on the riskiest companies.
| Dividend-paying ETFs | Price* |
|---|---|
$49.00 | |
$49.53 | |
PowerShares International Dividend Achievers Portfolio (PID, news, msgs) | $13.71 |
$49.64 | |
$49.81 |
*At May 13 close
More than just payouts
A fund that focuses on dividend growth rather than yield alone is a good bet for sturdy, high-quality names. Vanguard Dividend Appreciation (VIG, news, msgs) follows an index of companies that have upped payouts in each of the past 10 years.Click graphics to see interactive charts
Vanguard Dividend Appreciation
SPDR S&P Dividend
The fund held up relatively well during the market downturn, losing 9 percentage points less than Standard & Poor's 500 Index ($INX), which tumbled 55%. VIG yields a modest 2.2%. Over the past three years, it has run about 1 percentage point behind Vanguard Dividend Growth (VDIGX), an actively managed fund just added to the Kiplinger 25 (see "25 of the finest funds").
To obtain a heftier cash payout without sacrificing much in the way of quality, consider SPDR S&P Dividend (SDY, news, msgs), which yields 3.6%. The fund's underlying index screens for companies of any size that have increased dividends in each of the past 25 years, narrows the list down to the 50 stocks with the highest yields and then weights positions by yield. The portfolio is heavy on utility, industrial and consumer-related stocks.
Click graphics to see interactive charts
PowerShares International Dividend Achievers
SPDR S&P International Dividend
WisdomTree Emerging Markets Equity Income
In other words, these companies have been stress-tested. The fund lost 3.6% annualized over three years.
International exposure
Two offerings stand out among international developed-market offerings. PowerShares International Dividend Achievers Portfolio (PID, news, msgs) invests in only high-yield names that have boosted payouts in at least each of the past five years. It limits its universe to companies that trade in the U.S. as American depositary receipts, so investors have the assurance that the companies they own report under U.S. accounting standards. The fund, which yields 3.2%, lost 5.3% annualized over the past three years.For a bigger payout, consider the newer SPDR S&P International Dividend (DWX, news, msgs), which invests in the 100 highest-yielding stocks outside the U.S. and currently yields 4.8%. However, to gain inclusion, companies need only meet some basic profitability hurdles, so don't expect this fund to act defensively in a downturn.
For dividend payers in emerging markets, consider WisdomTree Emerging Markets Equity Income (DEM, news, msgs). The fund, which yields 3.4%, doesn't have a three-year record. It invests in the 30% of emerging-markets stocks with the highest yields. Note that the fund has an outsized 33% stake in Taiwan. Use sparingly.
This article was reported by Elizabeth Ody for Kiplinger's Personal Finance Magazine.
