Investors who like dividend-paying stocks should love exchange-traded funds (ETFs) that focus on dividend stocks – they provide the same benefits but with diluted risks.
With the stock markets gyrating and traditionally “safe haven” investments like U.S. Treasuries offering historically low yields, dividend stocks offer the lure of a reliable income stream.
“Dividends provide you with an income far better than you can get in bonds and with considerable protection against a down market,” said Martin Hutchinson, Money Morning‘s Global Investing Strategist.
Yet dividend stock ETFs also provide some measure of protection from a financial crisis at an individual company.
“Dividend ETFs mitigate the risk a company might commit the ultimate sin: suspend or cut a dividend,” Matt Krantz writes for USA Today. “By owning one ETF, which owns shares of hundreds of dividend-paying stocks, if just one company halts its dividend, the impact to the investor will be relatively small.”
ETFs own stocks like mutual funds, but are traded on the markets in “units” just like stocks. The units can be created (requiring the fund to buy more shares of the underlying stocks) or destroyed (requiring the fund to sell shares) to accommodate investor demand.
The Power of Dividends
Many investors underestimate the power of dividends. Hutchinson pointed to a study by Yale economist Robert Shiller that showed that dividends accounted for 67% of the average real return on common stocks from 1889 to 1998.
“While stock prices have been plunging, dividend payments are rising,” Hutchinson said. “Through Aug. 31, 243 companies in the Standard and Poor’s 500 Index increased or initiated a dividend payment. In fact, dividend payments are expected to end 2011 up 18% from 2010.”
Companies that manage ETF funds have created an increasing number of dividend stock ETFs to serve investors hungry for ways to add more dividend income to their portfolios.
The Four Best Dividend Stock ETFs
Standard & Poor’s Capital IQ Equity Research recently analyzed 1,100 ETFs to see which of the funds that focused on dividends had the best yields and excelled in several other criteria, including performance, risk, credit rating and volatility (based on its standard deviation).
That narrowed the list to 13 funds, of which most were general funds. Four of those ETFs, however, are specifically focused on dividend stocks.