One of the Best Ways to Build a Dividend Portfolio I've Ever Seen...

David Goodboy's picture

Thursday, August 30, 2012 - 12:00pm

by David Goodboy

To build wealth in the stock market, it takes time, study, and a little bit of good fortune. It pays to find a tactic or strategy that has been proven to work time and again. Combining two or more successful strategies can provide the edge needed to create a substantial nest egg or power a portfolio through retirement.

Investing for dividends is one proven method of building wealth. Everyone from Warren Buffett and Mario Gabelli to the heads of sovereign wealth funds to the average Joe investor participates in this strategy. The popularity of the dividend investment strategy is of no surprise, provided the fact that historically, more than 40% of the stock market's returns have been attributed to dividends. That's one of the reasons why Amy Calistri's Daily Paycheck newsletter is one of StreetAuthority's most popular and successful income advisories.

Given the ups and downs of the stock market, many investors believe that dividends are the only near certainty in a portfolio of investments. Not to mention that dividend-paying companies have proven themselves to be more stable and less volatile than their nondividend-paying brethren.

Another proven investing strategy is to diversify away from individual stocks into exchange-traded funds (ETFs). The ETF world is full of financial scientists cooking up new ways to package underlying securities into easily-tradable forms. If there is a commodity, index or financial product, then you can rest assured that someone, somewhere, is crunching numbers and running code to build an ETF designed around it. ETFs eliminate single-stock risk, provide exposure to a particular theme or grouping, and are easy to access.

Now imagine what kind of returns you would get if you combined both of these strategies into a single investment...

Dividend-based ETFs
There are more than 35 ETFs that focus on dividends, so how should investors decide which ones are best suited for their portfolio? Well, it boils down to personal goals and preferences. Of course, the first thing I look for is yield. The higher the yield, the better -- but it's got to be reasonably safe, too. 

An amazingly high dividend-yielding ETF, appropriately named Global X SuperDividend (NYSE: SDIV) makes sense if you want to go for maximum yield, like I do. The fund yields about 7.5%.

This ETF tracks an index of 100 superhigh-yielding international stocks and is equally weighted across all of them. The index, designed by Structured Solutions, is ingenious in that it's designed to get rid of companies that are expected to cut their dividends in the near future and keep those that are long-term dividend payers. Another positive aspect about SDIV is that is pays monthly dividends, unlike most dividend-based ETFs, which pay quarterly, semi-annually or even yearly. If you follow a Daily Paycheck-type strategy, with the goal of generating frequent dividend checks, then that's got to be music to your ears.

But it's important to keep in mind that these monthly dividends are not consistent. They vary from month-to-month, because of the way some international companies pay their dividends with large sums combined with smaller quarterly payments.

As you may imagine, this ETF does not use traditional sector weightings in its design. It simply focuses on high-yielding stocks, regardless of being overweight in particular sectors. For instance, the SuperDividend ETF has 65% of its assets in the real estate investment trusts (REITs), financials, banks, insurance and telecom sectors. In addition, the ETF drills down into countries with high dividend-yielding stocks. For example, about 24% of the fund is invested in Australia right now, with 66% of its holdings outside of the United States.

Country Breakdown

This SuperDividend ETF has returned almost 8% during the past 12 months, and that's after the 1.1% expense ratio. While that has lagged the overall market, this fund is primed to be a long-term wealth generator -- and a great starting point for a dividend portfolio.

Risks to Consider: Despite this ETF paying out handsome dividends, it has not beaten the S&P 500's performance during the same time frame. This is likely due to the U.S. dollar gaining strength against the other currencies of the ETF's holdings. Therefore, there is currency exchange risk built into this ETF. Just remember that this risk can also be a benefit should the dollar weaken substantially. In addition, the heavy sector and nation weightings do not provide much diversification in this regard. Remember that the goal of this ETF is to be exposed to high-yield stocks, and so far this ETF has met the goal.

Action to Take --> The SuperDividend ETF just surpassed $100 million in assets and has an enticing 7.5% yield. Not to mention, it was the fastest-growing ETF product by inflows last year. It deserves serious consideration in every dividend investor's portfolio.

P.S. -- Amy Calistri has developed a portfolio of dividend stocks like these that holds up remarkably well in down markets. For example, in the sell off last year the S&P 500 lost 5.3% in August alone. Despite all the turmoil, Amy's Daily Paycheck portfolio fell just 1.0% during the month. To learn more about Amy's strategy -- including a few more high-yield picks she likes -- you can visit this link to read 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.