Posted on 06 August 2011.
While many investors love high-flying growth stocks, the reality is the bulk of a portfolio’s returns over time come from dividends and that alone makes dividend-paying ETFs essential for any ETF investor. In this era of of low interest rates, cash investments are barely worth the paper they’re printed on.
There is almost no point to putting money in CDs or money market accounts. U.S. government bonds are now riskier than ever, but the yields don’t reflect that. Corporate bonds are only mildly better in the way of interest rates.
This confluence of factors makes owning dividend stocks and, beyond that, dividend-paying ETFs the most dependable avenues for income-starved investors to juice their returns without taking on unnecessary risk. That’s the good news. The trick with dividend-paying ETFs is finding the right one because this is one corner of the ETF universe that has expanded rapidly, leaving investors with a dizzying array of choices and not all of them are good.
Earlier this year, Morgan Stanley published a report noting that among all ETF styles, dividend-paying ETFs had garnered the third-highest amount of investor inflows through May of 2011. That’s indicative of the thirst for yield and dependable income and while those are two of the most important factors in selecting a dividend-paying ETFs, there is another element investors cannot ignore: Costs or the dividend-paying ETF’s expense ratio.
There is no point in reaching for yield if you’re going to hit on the back end with excessive fees because as those fees add up from year to year, they are dampening the positive impact of your dividend-paying ETF. For the conservative investor that is ultra-cost conscious, the Vanguard Dividend Appreciation ETF (NYSE: VIG) is one of the top dividend-paying ETFs out there. VIG’s expense ratio of 0.18% is simply paltry and if you become a Vanguard client, you can buy and sell the firm’s entire lineup of ETFs, including VIG, commission free.
The iShares Dow Jones Select Dividend Index Fund (NYSE: DVY) is another popular dividend-paying ETF, boasting over $6 billion in assets under management. While it features higher fees than VIG, its expense ratio of 0.4% is still reasonable. Not to mention, DVY’s holdings and composition differ enough from VIG’s that both ETFs can be held by income investors at the same time.
The largest ETF issuers such as iShares, SPDRs and Vanguard offer myriad dividend-paying ETF choices, but that doesn’t mean they are the end-all and be-all of the dividend-paying ETF universe. If you can handle moderately higher expense ratios, Guggenheim offers a pair of unique dividend-paying ETFs in the form of the Guggenheim Multi-Asset Income ETF (NYSE: CVY) and the Guggenheim ABC High Dividend ETF (NYSE: ABCS).
With an expense ratio of 0.6%, CVY offers investors exposure to assets classes such as REITs, foreign stocks and royalty trusts, all of which usually feature better yields than common stocks. ABCS has fees of 0.65%, but is worth a look for those that need a dividend-paying ETF with global exposure. Another dividend-paying ETF to consider is the newly minted Global X SuperDividend ETF (NYSE: SDIV), which is home to 100 stocks, each accounting for 1% of the fund’s weight.
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