Forget Chasing Hot Stocks -- Keep It Simple With These Dividend ETFs

By
A A A

We have all experienced the guy at the party who is always talking about his stock-picking skills. Hewill brag to anyone who will listen how he bought onestock or another near the lows, making a killing.

Icall this type of investor a "hot-stock chaser."

Hot-stock chasers are always looking for the next big thing in themarket . They jump aboard whatever is moving or whatever is supposed to be the next big thing. Jim Cramer is their hero, and their TV is always tuned to CNBC for the next sizzling tip. Jumping from stock to stock in a manic effort not to miss the stock of the day, week or month, hot-stock chasers are never satisfied.

When you first meet a hot-stock chaser, all you will hear about are his winninginvestments . Dig a little deeper, and you may discover that the hot-stock chaser also has a long history of money-losing investments.

This is due to the tendency of the professionalmoney to begin taking profits at exactly the moment a stock becomes ultra-popular. Sometimes hot-stock chasers do catch a solid upward move and earn substantial profits -- but it's more often akin to a crapshoot. Somestocks perform as expected, but many more fizzle out before anyone profits.

As you can see, being a hot-stock chaser is simply not a wise strategy for a long-term investor. It has been demonstrated over and over again thatinvesting success is built upon having a diversified basket of solid, dividend-producing stocks.

In fact, the majority of stock marketgains over the past several decades are attributable to dividends. Readers of Amy Calistri, Carla Pasternak and other experts here at StreetAuthority are well aware of the importance of dividend-producing stocks when it comes to buildingwealth . That strategy takes patience, and it can be a slow process, but it beats chasing hot stocks, hands down.

If you are just starting out withdividend investing or are not sure how to properly diversify your stock portfolio, there are several exchange-tradedfunds ( ETFs ) that do thediversification for you. These ETFs can be a great way to launch a well-diversified, dividend-earning portfolio. They are also a smart way for established investors to add a professionally managed diversified package of stocks in an easy, effective manner.

The ETFs best suited for a dividend portfolio are iShares Dow Jones Select DividendIndex Fund ( DVY ) and the SPDR S&P 500Dividend ETF ( SDY ) .

The Dow Jones SelectETF is up nearly 13% thisyear alone and the S&P 500 Dividend ETF boasts an advance of more than 16% over the same time.

Not straying from the StreetAuthority's high-yield methodology, the DVY ETF follows the Dow Jones Select DividendIndex . This index excludes any company with any negative dividend actions over the past five years. The SDY ETF tracks the S&P 500 High Yield Dividend Aristocrat Index, which requires companies to have increased dividends every year for the past quarter-century.

Unfortunately, as a result of these ETFs' incredibleappreciation , theirdividend yield has declined to less than 3%. Looking at the technical picture, both DVY and SDY have pulled back from their highs, findingsupport at the 50-day simplemoving average . This pullback into my value buy zone has set up perfect technical buy opportunities in both of these dividend-paying ETFs.

Risks to Consider: The primary risks with these dividend-paying ETFs is simply generalmarket risk . While they both meet the criteria for a diversified, dividend-paying stock package, both follow the major indexes. This means both ETFs will suffer further should the market, as a whole, begin a sustained pullback.

Action to Take --> I like both of these ETFs as long-term holds. However, there is a chance that the market will experience a substantial pullback in the near future. I strongly suggest tight stops at $63 for DVY and $65 for SDY to protect against the possible broad market selling.



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.

© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.


This article appears in: Investing , ETFs , Investing Ideas , Stocks

Referenced Stocks: DVY , SDY

StreetAuthority

StreetAuthority

More from StreetAuthority:

Related Videos

Stocks

Referenced

Most Active by Volume

75,031,044
  • $16.26 ▲ 0.31%
64,683,841
  • $99.76 ▲ 2.14%
44,561,744
  • $14 ▼ 6.23%
37,984,130
  • $27.93 ▲ 0.36%
36,148,020
  • $94.39 ▲ 1.49%
33,981,456
  • $22.93 ▼ 1.38%
33,971,527
  • $44.08 ▲ 1.03%
33,685,322
  • $76.95 ▲ 1.32%
As of 10/20/2014, 04:15 PM

Find a Credit Card

Select a credit card product by:
Select an offer:
Search
Data Provided by BankRate.com