The aftermath of the credit crisis has dramatically changed the behavior of corporations. To appease financial markets, companies quickly reduced costs, ramped up productivity and have enjoyed record profits ever since. But the crisis also led to other unexpected changes: a mountain of corporate cash.
Bolstered cash levels have led to rising dividend payouts, showering shareholders with much needed income.
In 2011, S&P 500 companies paid $240.6 billion in dividends, which was up 17% compared to 2010. Last year’s dividends were also the highest rate since 2008. And for 2012, dividends are expected to top $252 billion, according to dividend data on almost 400 companies tracked by S&P.
How can advisors tap into this wave of increasing dividends? And which ETFs can help them to boost their client’s income?
Industry sector ETFs that concentrate on segments of the market where dividends are increasing or higher than broader benchmarks offer one strategy for capturing more income. Investing in individual stocks and depending on dividend income from one company increases a client’s risk, whereas owning a basket of stocks is the safer strategy.
“Preferred stock ETFs are another way to diversify,” said Mark Mappa, CFP at Fusion Financial Group in Glenview, Ill. The iShares U.S. Preferred Stock Index Fund (PFF) carries a dividend yield around 6.99% and owns around 240 stocks in various sectors including banking, insurance and real estate.
Financial services stocks inside PFF account for around 70 percent of its sector exposure, but dividends in the financial sector have been improving. The S&P financial sector doled out $28.5 billion in dividends last year compared to $18.6 billion in 2010. Promising as that may be, the financial sector still has its constraints. As a result of the 2008 bailouts, U.S. banks still need federal approval before they can increase dividends. PFF’s annual expense ratio is 0.48%.
For advisors looking to diversify away for U.S. securities, BlackRock also offers the iShares S&P International Stock Index Fund (IPFF). The fund has 82% of its exposure concentrated in the financial sector. The top countries represented inside IPFF are Canada (79.17%), United Kingdom (11.25%) and Sweden (4.78%). IPFF’s dividend yield is 2.04%.
Utilities are another sector that has a record of consistently high dividends.
The Utilities Select Sector SPDR (XLU) has a 3.80% yield and owns S&P 500 stocks that produce and distribute electricity along with natural gas. Among XLU’s 33 holdings are utility titans like Duke Energy, Exelon and Dominion Resources. Over the past year, utilities have bucked the stigma of being a dull and low return sector. In 2011, XLU gained 19.53%. XLU’s annual expense ratio is 0.18%.
Another strategy for obtaining more income is ETFs that own stocks with a history of increasing dividends. Most of these dividend ETFs will also offer broader market coverage than what a sector fund can offer.
The SPDR S&P Dividend ETF (SDY) comprises the 60 highest dividend yielding stocks within the S&P Composite 1500 Index that have increased dividends every year for at least 25 consecutive years. While many dividend oriented equity ETFs are heavily concentrated in a handful of industries, like financials, SDY’s overall sector exposure is broader than most. Financial stocks make up just 19.23% of SDY, while consumer staples (18.7%), industrials (13.94%) and consumer discretionary (11.32%) are among the other top categories.
SDY is linked to the S&P High Yield Dividend Aristocrats Index. It carries a yield of 3.23% and charges annual expenses of 0.35%.