2015 Dividend Playbook: The Only Dividend Funds To Own

David Sterman's picture

Friday, January 23, 2015 - 12:00pm

by David Sterman

Thanks to the sharp pullback in bond yields in recent months, focus is shifting back to their counterpart in the equities sphere: dividend stocks. Investors can now choose from solid, yet safe, payouts, companies that generate impressive dividend growth and an industry that is likely to be a magnet for dividend hikes in the coming year.

But let's face it. There are so many stocks to choose from that produce solid and growing income streams that it can be hard to truly know which stocks are best. Perhaps the basket approach is better.

In the past few years, the field of exchange-traded funds (ETFs) that focus on dividend producers has continued to expand. Dozens of solid options now exist, and if you own three or four of them, then you can get all the exposure you'll need to this category of securities. Investors can also seek out mutual funds in their pursuit of dividend stocks, but as I recently noted ETFs offer similar exposure with lower costs.

Vanguard Dividend Appreciation ETF (NYSE: VIG)
With more than $20 billion in assets under management (AUM), this is the largest fund in the category. The fact that it is offered by Vanguard is part of the appeal, as that means it carries an ultra-low 0.10% annual expense ratio. (Schwab's comparable U.S. Dividend Equity ETF (Nasdaq: SCHD) carries an even more impressive 0.07% expense ratio.) By focusing on large and stable dividend producers, this VIG does not offer an above-average yield, which is currently around 2%.

While funds like this one have generally performed in line with the broader market over the past five years, they are likely to be a solid performer over the long haul. Morningstar notes, "Since 1926, stocks that pay a dividend have beaten non-dividend-paying stocks by about 1.7% annualized." Equally important, such stocks deliver solid returns with a bit less volatility than the broader market. VIG sports a beta of 0.92.

PowerShares International Dividend Achievers ETF (NYSE: PID)
This ETF also focuses on large, stable dividend payers, broadening the scope to include foreign stocks -- but only those that have a listing in the United States or London. Morningstar notes, "This fund has been significantly less volatile than other international dividend-strategy ETFs, and it produced better risk-adjusted return."

Foreign companies take a slightly different approach to dividends. They often produce higher dividends, thanks to higher payout ratios, but they also move more quickly to slash the dividend in tougher times.

In 2009, this fund's annual dividend fell by 34%, twice the rate of U.S.-focused dividend ETFs.  Reflecting the relative underperformance of foreign stocks in recent months (especially on a dollar-weighted basis), this fund has fallen roughly 10% from its 52-week high. That factor, coupled with a relatively higher payout ratio, leads to a fairly impressive 4% dividend yield.

WisdomTree Small Cap Dividend ETF (NYSE: DES)
A focus on small caps holds obvious appeal: Smaller companies often possess relatively robust growth prospects, so the growth in their dividends can also be commensurately more impressive. More than a quarter of the portfolio is tied up in financial stocks, which, as I noted in Part 4 of this series, is likely to be the sector capable of generating the most impressive dividend growth in the year ahead. The 2.7% yield and the 0.38% expense ratio are middling for this peer group.

Global X SuperDividend ETF (NYSE: SDIV)
This fund focuses on the world's top yields. The underlying index on which it's based intentionally avoids too much industry or geographic concentration. The fact that a quarter of the portfolio is invested in U.S. stocks and another 30% is invested in Australia, Canada and the U.K. reflects the fact that these countries are home to the majority of dividend-paying companies in the developed world. The 0.58% expense ratio is a bit stiff, but the 5.5% yield is hard to beat.

This ETF, along with the PowerShares dividend ETF profiled earlier, don't produce 100% qualified yields. As a result, it's wise to check with the fund sponsors to understand the tax ramifications for your portfolio.

ALPS Sector Dividend Dogs ETF  (NYSE: SDOG)
This fund takes an unusual approach to dividends, focusing on the five highest yielding stocks (based on regular cash dividends) in each of 10 different industries. The 3.4% yield is not quite as impressive as the GlobalX fund noted above, but this approach has led to impressive capital appreciation as well.

It was launched in 2012 and has outperformed the S&P 500 by about two percentage points each year. The 0.40% expense ratio is quite reasonable in light of that combination of performance and yield.

Risks To Consider: The expense loads associated with these ETFs can eat into yields, which can be especially painful in bear markets. These funds are likely to generate solid results again in 2015 as interest rates stay low. But an eventual rise in interest rates could draw some funds away from these kinds of investments.

Action To Take --> These funds help avoid the need to constantly seek out new dividend-producing stocks. They are set-it-and-forget-it baskets of stocks that can shore up that value end of your investing portfolio.

Not only does StreetAuthority's resident income expert hold a few divided-paying ETFs in her portfolio -- as well as other securities of every variety -- but she uses them to build long-term wealth. Since Amy Calistri began using this strategy in The Daily Paycheck, she has earned more than $76,000 in dividends. We, at StreetAuthority, have been so impressed that we urged her to spread the word to a wider audience. That's why, for the first time, Amy took the stage to explain exactly how The Daily Paycheck strategy works. If you haven't already, I encourage you to watch the exclusive presentation here. You won't be disappointed.

 

    

David Sterman 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.