Dividends ETFs, for the Yield

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Dividend ETFs have traditionally been attractive as a steady income generator and defensive play. During the Financial Crisis, however, dividend ETFs suffered from overexposure to financial firms. Banks and insurance companies were throwing off cash in large amounts, but these were not the safe, predictable dividends of previous eras. These were dividends paid out of fees from inadvisable real estate loans. When financials cratered, dividend ETFs took it on the chin.

There is reason to believe that dividend stocks are once again a steady income producer and defensive instrument. Sector holdings in the SPDR S&P Dividend ETF (NYSEArca:SDY), for instance, are spread out better than previously:

Sector % holdings
Consumer Goods 26.36%
Utilities 21.23%
Industrial Materials 16.92%
Financials 10.41%
Health 9.25%

Financials are about half as important as they were in most dividend ETFs. None of the sectors above are at frothy valuations. Absent as usual is technology, whose companies traditionally use every spare dime to fund new growth.

Other major ETFs in the area include Vanguard Dividend Appreciation ETF ( VIG ), Vanguard High Dividend Yield ETF ( VYM ) and WisdomTree Total Dividend ETF (NYSEArca:DTD). In 2010 they all rebounded nicely from a summer scare and did as good or better than large caps generally (SPY):

More US companies cut their dividends in 2009 and fewer raised them than any other year on record, according to Standard & Poor's. As expected, dividend streams firmed in 2010, but yields are relatively modest compared to historic norms.

A good stock yield these days is 3-4%. This is still strong relative to Treasuries which pay out negligible rates. Investment-grade bonds are in mid-single digits but offer no equity upside. Bond experts like Bill Gross are so dismayed by low bond yields that they are touting high-yield stocks even though they have few funds in the asset class. Unlike fixed income where the only danger is inflation and rising interest rates, dividend stocks also have fundamental economic risk. This low inflation environment, if it does not descend into true deflation, is ideal for dividend stocks. Benjamin Graham, the father of fundamental stock analysis, who often valued companies on the basis of their expected future dividend payments, would be pleased with their outlook.

For specialized dividend ETFs, WisdomTree is the clear leader with dozens of offerings:

  • WisdomTree Dividend Top 100 ETF (NYSEArca:DTN), annual fees: 0.38%
  • WisdomTree SmallCap Dividend ETF (NYSEArca:DES), annual fees: 0.38%
  • WisdomTree LargeCap Dividend ETF (NYSEArca:DLN), annual fees: 0.28%
  • WisdomTree MidCap Dividend ETF (NYSEArca:DON), annual fees: 0.38%

Fundamental

  • Invesco PowerShares Dividend Achievers ETF ( PFM ), annual fees: 0.5%
  • Claymore/BBD High Income ETF ( LVL ), annual fees: 0.6%
  • Invesco PowerShares High Yield Equity Dividend Achievers Portfolio ETF ( PEY ), annual fees: 0.5%
  • WisdomTree DEFA High-Yielding Equity ETF (NYSEArca:DTH), annual fees: 0.58%

International

  • WisdomTree Emerging Markets High-Yielding Equity ETF (NYSEArca:DEM), annual fees: 0.63%
  • WisdomTree Emerging Markets SmallCap Dividend ETF (NYSEArca:DGS), annual fees: 0.63%
  • WisdomTree Europe Dividend ETF (NYSEArca:DEB), annual fees: 0.48%
  • WisdomTree Europe High-Yield Equity ETF (NYSEArca:DEW), annual fees: 0.58%
  • WisdomTree Europe SmallCap Dividend ETF (NYSEArca:DFE), annual fees: 0.58%
  • WisdomTree International Dividend Top 100 ETF (NYSEArca:DOO), annual fees: 0.58%
  • WisdomTree International LargeCap Dividend ETF (NYSEArca:DOL), annual fees: 0.48%
  • WisdomTree International MidCap Dividend ETF (NYSEArca:DIM), annual fees: 0.58%
  • WisdomTree International SmallCap Dividend ETF (NYSEArca:DLS), annual fees: 0.58%
  • WisdomTree Japan Dividend ETF (NYSEArca:DXJ), annual fees: 0.48%
  • WisdomTree Japan High-Yield Equity ETF (NYSEArca:DNL), annual fees: 0.58%
  • WisdomTree Japan SmallCap Dividend ETF (NYSEArca:DFJ), annual fees: 0.58%
  • WisdomTree Middle East Dividend ETF (GULF), annual fees: 0.88%
  • WisdomTree Pacific ex-Japan Dividend ETF (NYSEArca:DND), annual fees: 0.48%
  • WisdomTree Pacific ex-Japan High-Yielding Dividend ETF (NYSEArca:DNH), annual fees: 0.58%
  • SPDR S&P International Dividend ETF (NYSEArca:DWX), annual fees: 0.45%
  • Claymore/AlphaShares China Small Cap ETF (HAO), annual fees: 0.7%

Co-founder of indexfunds.com, author of two books on investing, and founder of ETFzone.com, Will has been writing on indexing issues for 8 years. He holds an MBA from the University of Texas at Austin.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs

Referenced Stocks: LVL , PEY , PFM , VIG , VYM

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