4 Things To Consider When Looking At Dividend ETFs

In turbulent times, the conservative investors tends to turn to a safe zone, in particularly, dividend-focused exchange traded funds (ETFs).

Dividend-focused ETFs are great in that they enable your money work for you on its own while enabling investors to gain access to various markets and sectors.  One may wonder how to chose a stable dividend ETF. After all, at the end of 2008 there were 14 different such ETFs to chose from.

Here are some things to consider when choosing a dividend ETF:

• Pick ETFs that hold stocks with nice, sustainable dividend yields
• Focus on ETFs that hold stocks with a history of paying out dividends and are hoarding enough cash to cover the current payout, states John Spence of Market Watch.
• Be mindful of ETFs that are heavily concentrated on a single sector which may be in trouble. For example, financials. After all, when earnings fall, dividends do, too.
• Know exactly what stocks your ETF holds and how concentrated these holdings are.

As uncertainty and volatility continue to overshadow the market, investors will continue to look for ways to moderate the risk of their portfolios, making dividend ETFs attractive.  We may sound like a broken record, but do your homework, assess your appetite for risk and know what your overall financial goals are when choosing the right ETF for your portfolio.

Some ETFs to consider are:

First Trust Value Line Dividend Index (FVD): down 6.8% over the last month and generating a yield of 4.2%

WisdomTree International SmallCap Dividend (DLS): down 8.9% over the past month and generating a yield of 6.5%

Subscribe by RSS Subscribe by Email

Comment by liz

2009-02-16 15:26:49

Can someone pls explain to me why ETFs that have lost more over the last month, than their dividend yield, would be attractive? Or stocks for that matter? Isn’t this yield only attractive if you think they have bottomed? Is there something I am not getting about dividend stocks??

Reply to this comment

 

Comment by Tom Lydon

2009-02-18 14:39:03

Hi Liz,

Thanks for your comment.

Dividend yields on a particular market segment are a concrete measure of the market’s valuation levels-whether those stocks are offering attractive terms to entice you to invest in them compared to their competing asset classes.

Stocks’ biggest competition comes from either cash or bonds. The short term returns on money markets are at or near zero today. The 10-year US government bond is yielding under 3%, the lowest level in over 50 years.

These low yields in bonds offer the least enticing terms this century for bonds, and the primary reason investors are accepting these low yields today is an extreme amount of risk aversion about losing money in stocks.

The Dividend Yield on a basket of large cap us dividend stocks measured relative to the dividend yield on the S&P 500 is also another valuation measure to gauge the attractiveness of the dividend basket.

Of course, the market always could move more in the short term than the dividend yield offers you. But owning stocks was never supposed to be a risk-free proposition, and we believe having strong underlying valuation metrics such as the dividend yield underpinning your investment is the best way to minimize that risk.

Reply to this comment