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Quality Wins The Marathon Race In Dividend ETFs

Posted
4/18/2013 5:27:00 PM
By: Investor's Business Daily
Referenced Stocks:PBI;PEP;PG;SDY;VIG

When the stock market stumbles, some amateur investors decide it's time to chase big yields.

Yet, a look at three exchange traded funds in the stock market today shows why focusing on yield alone is the wrong thing to do.

Keep in mind that a stock's yield is often supersized because no one would buy the stock if it had to compete on its fundamentals alone.

In some cases, a fierce sell-off has ballooned the yield. Problems that create a sell-off sometimes lead to a cut or eliminated dividend.

Vanguard Dividend Appreciation ETF ( VIG ) has a quality approach to dividends. The fund tracks the performance of the Nasdaq U.S. Dividend Achievers Select Index.

How does a stock gain Achiever status? It must lift its dividend every year for at least 10 years and must meet volume requirements.

As of March, the two biggest holdings in the Vanguard ETF werePepsiCo ( PEP ) andProcter & Gamble ( PG ).

The annualized dividend yield is 2.2%, which isn't big enough for the big-yield set.

SPDR S&P Dividend ( SDY ) is also quality focused. It tries to match the S&P High Yield Dividend Aristocrats Index.

An Aristocrat has raised its dividend every year for at least 25 years.

The top holdings arePitney Bowes ( PBI ) andAT&T (T). The yield is 2.8%.

Now it's time to think big.

Global XSuperDividend (SDIV) offers a whopping dividend yield of 7.7%.

The top holding isBGC Partners (BGCP), a $5 stock with an 8.7% annualized payout.

SuperDividend's giant yield, however, is only part of the story.

Since its launch in mid-June 2011, SuperDividend's price has fallen 6%. Meanwhile, the Vanguard and SPDR dividend funds are up 20% and 24% in the same period.

That's how big becomes little in the market, and little becomes big.