Everything You Should Know About Dividends And ETFs

Some of the best dividend stocks and exchange traded funds (ETFs) are the ones that increase over time so that they match the inflation rate.

There are certain reasons a company will cut or increase a dividend, as explained by ABCs of Investing:

• Dividend Cuts. A company will pay out a dividend from its cash reserve so if the company is not making much money then it might reduce the amount of the dividend or even remove it altogether. This is better for the company so they do not bankrupt, but harder on shareholders. Bank of America (BAC) is an example, who has run into a number of problems related to sub-prime loans so rather than continue to pay out the normal dividend and risk running out of cash, the company decided to decrease the amount of dividend.
• Dividend Suspensions. This is the worst case scenario, as a company such as General Motors (GM), who has major financial problems, has stopped paying out shareholders. Changes to stock dividends will often affect the stock price - if the dividend increases then the stock may go up and vice-versa.

So, which companies are steadily paying out according to an inflationary schedule? Well, the S&P 500 Dividend Aristocrats was recently published and it includes companies that have increased dividend payouts over 25 years. Investing School explains that the Aristocrats Index is an equally-weighted index that is re-weighted every quarter.  Also, all companies are reviewed annually to make sure that the companies have increased their dividends and new companies are added to make the list current.

Remember that just because this index does outperform the S&P 500 (^GSPC) under normal market conditions, doesn’t mean that it will make you money. The list of companies includes:

• 3M Co. (MMM)
• Anheuser Busch (BUD)
• Coca Cola (KO)
• Exxon Mobil (XOM)
• Target (TGT)

• SPDR Dividend ETF (SDY): This fund targets just the high-yield Aristocrats. It’s down 20.5% year-to-date; up 5.4% over one week. It yields 7.25%.

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Comment by Rick Herbold

2009-03-23 13:25:05

I have been looking for yield for some time now. Seems that you cannot lose with ETFs ? Example: invest in a basket such as:

• iShares FTSE NAREIT Retail ETF (RTL: 10.97 0.00 0.00%): which got slaughtered in 2008, but shoots of an impressive yield of 13.6%
• PowerShares Financial Preferred Portfolio (PGF: 9.35 +0.95 +11.31%), we all know how well this sector performed last year, but PGF yields 13.6%
• iShares S&P U.S. Preferred Stock ETF (PFF: 23.296 +1.336 +6.08%), a yield of 10.8%
• iShares iBoxx High Yield Corporate Bond ETF (HYG: 68.982 +1.212 +1.79%), producing a yield of 10.6%
• PowerShares Insured National Municipal Bond Portfolio (PZA: 21.856 -0.074 -0.34%), a 5% yield, but keep in mind that this yield is partially tax-free
• iShares DJ Select Dividend ETF (DVY: 31.70 +0.95 +3.09%), a fairly well-established ETF that has a generous exposure to financials and generates a yield of 6.9%
• State Street’s S&P Dividend ETF (SDY: 33.35 +1.37 +4.28%), shooting off a yield of 6.3%
• SPDR DJ Wilshire Large Cap Fund (ELV: 42.57 +1.69 +4.13%), producing a modest yield of 5.1%
• iShares Russell 1000 Value ETF (IWD: 41.214 +1.654 +4.18%), generating a yield of 4.2%

All the companies in these ETFs cannot go bust or cut dividends all at once. If the share prices go up, great. If the share prices go down, OK too …. you still have high dividends.

Maybe I’m missing something here ???? Seems like a no brainer to invest in high yield ETFs in retirement.

Rick

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