From the December 2008 issue of Research Magazine • Subscribe!

Dividend Investing with ETFs

Who likes to wear shorts in the winter or a coat in the summer? Some things are just out of style.

Until recently, dividends were out of style. During times of economic expansion, investors are willing to forgo a dividend payout in return for capital gains. On the flip side, when investors are fearful they demand money (dividends) up front.

The S&P 500 (SPY) has a dividend yield of 3.09 percent while the Dow Jones (DIA) pays 3.38 percent. This is significantly higher than the 2000 dividend yield low of 1.40 percent but much lower than dividends paid in the 1970s and 1980s.

An analysis of the ETF universe reveals that many ETFs pay a respectable dividend yield even though only 11 are designated as dividend ETFs. The iShares Dow Jones Select Dividend ETF (DVY) is viewed by many as benchmark for dividend ETFs. DVY currently yields 5.79 percent. Other ETFs like the PowerShares Financial Preferred Portfolio yield significantly more (12.87 percent). The extra yield however comes at a price. Attaining such a high yield requires a significant allocation to the volatile financial sector. On paper, stocks like Citigroup boast a dividend yield of nearly 10 percent. In exchange for accepting government money however, Citi was forced to cut its dividend to 1 penny per share per quarter. To make matters worse, shares of Citigroup plunged from $55 to as low as $3.

Plain value ETFs are a conservative alternative to risky dividend bets in the financial sector. The Vanguard Value ETF (VTV) comes with a 4.56 percent dividend yield at a rock bottom price of 0.10 percent a year.

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Ron DeLegge is the San Diego-based editor of www.etfguide.com.

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