In the past few years, interest rates in the U.S. and other
developed countries have been at, or near all-time lows. In this
scenario, investors seeking current income have eventually shifted
their focus to dividend paying stocks.
With low yields from traditional sources of income, this trend
is expected to continue in the rest of fiscal 2012 and into the
future as well. This is especially true given the highly
accommodative policies from the Fed and the ECB, and the high
likelihood that these programs will continue for many years to
Dividend paying stocks also play a defensive role and provide
steady and stable returns to the investor when the market is not
heading in a positive direction (
Can You Beat These High Dividend ETFs?
). Dividend paying exchange traded funds (ETFs) can also offer this
attributes while simultaneously offering investors a more spread
out and thus less risky security profile.
In the ETF space, there are some products which can provide
outsized returns to the income investor. This holds true especially
for the products that have achieved noteworthy dividend rates.
In fact, investors will find that some ETFs have a similar
profile to the S&P 500 but pay out higher rates of current
income. Thanks to this, there is no shortage of choices for
investors in this low rate environment that can still generate a
decent level of current income (
Three Excellent Dividend ETFs for Safety and
Our top recommendation for the investors with low risk
tolerance, seeking exposure to dividend ETFs, is the Vanguard
Dividend Appreciation ETF (VIG). Currently, the fund receives a top
position and a Zacks #1 ETF Rank or 'Strong Buy'. Thus, we expect
this ETF to outperform its peers that have a similar (low) level of
About Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in the
context of our outlook for the underlying industry, sector, style
box, or asset class. Our proprietary methodology also takes into
account the risk preferences of the investors.
The aim of our models is to select the best ETFs within each
risk category. We assign each ETF one of five ranks within each
risk bucket. Thus, the Zacks Rank reflects the expected return of
an ETF relative to other ETFs with similar level of risk.
For investors seeking to apply this methodology to their
portfolio in the U.S. dividend market, we have taken a closer look
at the top ranked VIG below:
Vanguard Dividend Appreciation ETF (
Investors seeking more stability in their portfolios along with
high levels of current income can invest in Vanguard Dividend
Appreciation ETF. VIG tracks the performance of the Dividend
Achievers Select Index which holds a total of 133 stocks.
It looks to focus on U.S. common stocks that have a history of
increasing dividends for at least ten consecutive years, thereby
providing steady and stable returns to the investor (
Four Vanguard ETFs for Long-Term Investors
This produces a fund that pays out a solid dividend yield of
roughly 2.1% a year, a good level considering the focus of VIG.
This is because VIG zeroes in on companies that are high quality
dividend payers rather than those that have purely high yields.
High yielders can be considered riskier which could make them
less appropriate for income starved investors that have a low risk
tolerance. With that being said, investors should note that VIG's
yield is higher than the average S&P dividend yield of 1.94%
meaning that it is a quality destination for income in addition to
a low risk choice in the space (
Three Impressive Small Cap Dividend ETFs
With a focus on companies that have increased their payouts for
ten successive years, the fund appears to be more tilted towards
Consumer Discretionary (14.5%), Consumer Staples (25.6%),
Industrials (21.1%) and Energy (10.2%) (
Top Three Consumer Staples ETFs
). These four are the only sectors in the list which receive
Large cap companies dominate the market cap holdings of the fund
with a small portion relegated to mid caps and small caps. With an
exposure to companies with a history of consistent dividend growth,
VIG does not appear to be concentrated among its individual
holdings, as the top 10 make up just 39.2% of the total asset
allocated. This suggests that company-specific risk is low in the
fund and the top 10 holdings don't dominate the returns of the
From an individual holdings perspective, Wal-Mart Stores Inc.
and Coca-Cola Co receive equal weightings of 4.5% of the total
while Pepsi Co gets the third position with 4.2% of the total.
Among others, the fund does not allocate more than 3.9% to any one
company, suggesting wide diversification.
This dividend ETF charges an expense ratio of 13 basis points on
an annual basis making it a low cost option in the segment, while
volume and AUM levels also suggest a tight bid ask spread. The
product's index also has decent valuation metrics as a whole,
making VIG an interesting pick for investors looking for a top
ranked dividend choice in today's market.
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VANGD-DIV APPRC (VIG): ETF Research Reports
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