News Analysis date published New: 
Friday, March 1, 2013 - 14:30
New Date created: 
Friday, March 1, 2013 - 14:30
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Friday, March 1, 2013 - 14:30

Take Advantage of the "Dividend Vault" With These 2 ETFs

Friday, March 1, 2013 - 2:30pm

If you read StreetAuthority regularly, then you probably know about the "Dividend Decade." This is a prediction by StreetAuthority Co-Founder Paul Tracy that dividends will account for all of the market's returns during the next 10 years. -- partly because of the record amount of cash in corporate coffers.

Combine the ultra-high cash reserves with the fact that the dividend tax increase was less than expected and it creates the perfect environment for the Dividend Decade to come true. Remember, it's only those in the highest tax bracket (income of more than $400,000) whose dividend taxes will increase from 15% to 20%, which is lower than some had expected. Investors in lower tax brackets will not be saddled with this tax increase.

In 2012, S&P 500 companies together paid out a record $281 billion in regular cash dividends. This was 17% higher than 2011. If that rate continues, then it would take more than six years to exhaust the "Dividend Vault" of $1.7 trillion that the Federal Reserve says public companies have stockpiled.

One way to take advantage of the Dividend Vault is to purchase exchange-traded funds (ETFs) that track cash-rich and stable dividend-paying companies. Investing in dividend-focused ETFs is a hands-off and inexpensive way to obtain professional management of a basket of individual stocks, all while maintaining control over the total investment.

Here are two dividend-paying ETFs you should consider owning…

1. PowerShares S&P 500 High Dividend Portfolio (NYSE: SPHD)
Launched in October 2012, this ETF is the new kid on the block. Its stated goal is to combine high dividend-paying stocks with low volatility. It follows an index made up of 50 stocks that share the high-dividend, low-volatility theme.

As you might guess, its portfolio is heavily geared toward utilities with nearly 24%, consumer stocks with 18% and the remaining holdings comprising of a diversified mixture of energy, financials, health care, industrials, technology and materials stocks.

Investors clearly like the underlying theme of this ETF as it has already attracted $41 million in assets during its short lifetime. The distribution yield is a little more than 4%.

I like this ETF because of its newness to the market and relative small size. These types of new investments are compelling because it means strong future growth potential as they expand their asset base.

2. Vanguard Dividend Appreciation ETF (NYSE: VIG)
Despite its unfortunate ticker symbol (VIG means commission or costs in trading lingo), this ETF is presently the largest dividend-paying ETF available, with nearly $13 billion in assets.

It only holds stocks with a solid record of dividend increases. In fact, VIG strictly seeks out companies with a 10-plus year track-record of dividend increases for its underlying base. The ETF is home to 133 large-cap stocks with an average market capitalization of $40 billion each.

The top-three holdings include the traditional, stable dividend payers such as Wal-Mart (NYSE: WMT), Coca Cola (NYSE: KO) and Procter & Gamble (NYSE: PG). One of my favorite traits about this ETF is its ultra-low expense ratio of 0.13%, making it one of the less costly in its niche.

However, the dividend yield is just a little more than 2%, which is just slightly higher than the average yield of the S&P 500. This is why VIG is best suited for investors with a long-term horizon, seeking stability with capital growth.

Risks to Consider: Both these ETFs contain market risk. No matter what the past performance or analysts' opinion, always use stops when investing and position size based on your risk tolerance.

Action to Take -- > Both of these ETFs are one of the easiest way to take advantage of the Dividend Decade. It makes sense to purchase SPHD now, but wait for VIG to break out above resistance at $64.

P.S.-- Here's what the "Dividend Vault" could mean for you... tax-free dividends, monthly dividend income, nine years of dividends in one day, and even an 85% dividend yield from a stock yielding 3%. Which type of dividend would you rather have? The good news is, you don't have to choose just one. You can learn how to get all three types -- starting as early as next month. Click here for more...

David Goodboy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

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