Exchange Traded Funds (ETFs)

5 ETFs That Focus on Dividends

By Elizabeth Ody, Associate Editor

From Kiplinger's Personal Finance magazine, May 2010

Yield-hungry investors have a full menu of choices among exchange-traded funds that invest in dividend payers. But just as an abundance of tempting entrees at a smorgasbord can leave you paralyzed with indecision, too many investment options can also be a bad thing.

Narrow your choices by looking for funds that offer more than just a fat yield. After all, the stocks with the highest yields tend to be associated with the shakiest companies -- the ones that may be ill-equipped to sustain payouts in a downturn. And a disproportionate chunk of the market's top yielders tend to reside in the financial sector, which was the epicenter of the 2007-09 stock-market conflagration. Because ETFs track indexes rather than rely on active managers to pick securities, it's important to choose a dividend ETF that has some safeguards against loading up on the riskiest companies.

A fund that focuses on dividend growth rather than yield alone is a good bet for sturdy, high-quality names. Vanguard Dividend Appreciation (symbol VIG) follows an index of companies that have upped payouts in each of the past ten years. Using a secret formula, the fund drops companies that may not be able to continue to raise payouts, then it weights the companies that make the cut by market value. The result is a portfolio of about 200 high-quality blue-chip names, including Procter & Gamble, Coca-Cola and Johnson & Johnson. The fund held up relatively well during the market downturn, losing nine percentage points fewer than Standard & Poor's 500-stock index, which tumbled 55%. It yields a modest 2.2%. Over the past three years through March 12, it lost 1.5% annualized, about one percentage point more than the decline of Vanguard Dividend Growth, an actively managed fund just added to the Kiplinger 25 (see Our 25 Favorite Funds).

To obtain a heftier cash payout without sacrificing much in the way of quality, consider SPDR S&P Dividend (SDY), which yields 3.6%. The fund's underlying index screens for companies of any size that have increased dividends in each of the past 25 years, narrows the list down to the 50 stocks with the highest yields, and then weights positions by yield. The portfolio is heavy on utility, industrial and consumer-related stocks. Investors can sleep well knowing that any company that makes the cut managed to raise its payouts in both 2008 and 2009. In other words, these companies have been stress-tested. The fund lost 3.6% annualized over three years.

Two offerings stand out among international developed-market offerings. PowerShares International Dividend Achievers Portfolio (PID) invests only in high-yield names that have boosted payouts in at least each of the past five years. It limits its universe to companies that trade in the U.S. as American depositary receipts, so investors have the assurance that the companies they own report under U.S. accounting standards. The fund, which yields 3.2%, lost 5.3% annualized over the past three years. For a bigger payout, consider the newer SPDR S&P International Dividend (DWX), which invests in the 100 highest-yielding stocks outside of the U.S. and currently yields 4.8%. However, to gain inclusion companies need meet only some basic profitability hurdles, so don't expect this fund to act defensively in a downturn.

For dividend payers in emerging markets, consider WisdomTree Emerging Markets Equity Income (DEM). The fund, which yields 3.4%, doesn't have a three-year record. It invests in the 30% of emerging-markets stocks with the highest yields. Note that the fund has an outsized 33% stake in Taiwan. Use sparingly.

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