Dividend exchange traded funds (ETFs) may have taken a hit and put off investors during the downturn. But dividends are still a safe and stable way to earn a little extra money.
Looking back at the dividend landscape of the last few years, Todd Wenning for The Motley Fool says that we can glean five key lessons as we move forward.
- Not a guarantee . It ultimately comes down to a company's board of directors to dictate whether or not we get a cash dividends. Although, dividends do help attract income investors and also shows financial strength. But in volatile times, reducing dividends to raise or preserve money becomes a better choice for companies.
- Don't chase yields . Higher yields do look tempting but they come with higher risks, which a lot of people learned when booms turn to busts. So, be wary if an security offers anything that is two-and-a-half times the broader market average, or currently around 5% or more.
- The focus is cash . Earnings may look nice but a company with cash will actually be able to pay its shareholders. Investors will have to look at a company's cash flow from operations going about five years back minus capital expenditures, which leaves "free cash flow."
- Diversify . As always, spreading money around will help mitigate the risk of taking a single hit in one area or sector of the market, even if one has to sacrifice a little more yield in the short-term. [ MLP ETFs: A Fixed-Income Alternative. ]
- Be selective . Don't just pick out an investment because someone told you to. Do your due diligence and pick out what fits your investment goal.
Long-term dividend investing is secure, usually very profitable and a simple way to invest, writes Shaun Connell for Learn Dividends . Connell provides his reason why investors should take a look at income investing with dividends:
- Passive income . Dividend paying assets dish out passive income that pays an investor automatically forever.
- Security . The passive income will not be heavily influenced by the price of the stock. With dividend stocks, one never sells or risk losing an investment. [ In Bull Markets, Utility ETFs Still Have Benefits. ]
- Simplicity . In today's world with all the fancy securities available, dividend investing keeps it simple.
The top two yielding dividend ETFs are PowerShares KBW High Dividend Yield Financial (NYSEArca: DES) , which yields 4.4%. It also has a high level of exposure to financials, which account for nearly 50% of the fund. Industrials, consumer staples and utilities also play a part.
For more information on dividend ETFs, visit our dividend ETFs category .
Max Chen contributed to this article .