Tag Archives: PFF

5 ETFs for the Dividend Investor

If you’re looking to build a portfolio around companies that pay dividends, you’ll find a treasure trove of choices in exchange-traded funds. At least 35 ETFs follow a dividend-focused strategy, investing in income-paying stocks of large companies and small ones, in U.S. corporations as well as firms based overseas. And that doesn’t include the ETFs that invest in real estate investment trusts and master limited partnerships, two groups that tend to offer high yields.

It’s no surprise that dividends have returned to their rightful place as a key building block in investor portfolios. Historically, dividends have accounted for more than 40% of the stock market’s returns. They represent real cash in your pocket now. And after watching their paper profits go up in flames twice during the past decade’s two bear markets, burned investors realize that dividends are the only sure profits they can count on from stocks.

More than that, dividend-paying companies are among the most stable and least volatile companies on the market. The constant need to pay cash means these companies are consistently profitable and have management teams capable of keeping them that way.

Yield — a stock’s annual dividend rate per share divided by its share price — is always an important consideration when building a dividend-based portfolio. SPDR S&P 500 (SPY), an ETF better known as the Spider, tracks Standard & Poor’s 500-stock index; as of December, the ETF yielded 1.8%. SPDR Dow Jones Industrial Average ETF (DIA), formerly called the Diamonds, yielded 2.5%. If you can get yields of this amount from the key market benchmarks, you should eliminate any fund that pays less.

One of the best strategies is to invest in companies that increase their dividends on a regular basis. Firms that boost their payouts regularly are almost always those that generate steadily rising profits and are run by managers who are confident about the future.

Our top choice is SPDR S&P Dividend ETF (SDY), which tracks the S&P High-Yield Dividend Aristocrats Index. It holds 60 companies from the S&P 1500 Index that have lifted their dividends at least 25 straight years. Most are high-quality, large-capitalization stocks that trade at reasonable prices.

Over the past five years, SDY returned 3.3% annualized, beating the S&P 500 by an average of one percentage point per year. In 2010, the ETF returned 16.4%, compared with the S&P’s 15.1% rise. SDY’s annual expense ratio is 0.35%. (All returns are through December 31.)

For the full write up on the other five ETFs, WisdomTree Emerging Markets Equity Income Fund (DEM), First Trust DJ Global Select Dividend Index Fund (FGD), iShares S&P U.S. Preferred Stock Index Fund (PFF), Guggenheim Multi-Asset Income ETF (CVY) go to Kiplinger.com to read 5 ETFs for the Dividend Investors.

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Hennessy Affirms Negative Outlook

I recently discussed the state of the economy and stock market with Neil Hennessy, head of the Hennessy Funds. Hennessy doesn’t run any ETFs, but follows a dividend strategy in most of his mutual funds.

Hennessy agrees with Ed Keon, the portfolio manager at Quantitative Management Associates, that there continues to be a high level of caution and pessimism in the country. (Cautious Forecast for Next 6 Months)

“American investors have absolutely no faith that their government can correct the problems,” says Hennessy, adding that companies are not hiring because they don’t know what the health care and regulation costs will be. “If I don’t know the cost of an employee, why would I hire one?”

He says most people have moved pass the financial crisis to focus on three contentious issues that currently dominate the media: the new health care system, immigration and the poor job the government did about cleaning up the oil spill in the Gulf of Mexico.

“There’s no leadership coming out of Washington,” says Hennessy, and “no confidence in leaders, leads to no confidence in the stock market.”

However he predicts that companies will focus on dividends to make the stock market go higher. Currently companies are hoarding historical levels of cash. Hennessy says the 30 companies in the Dow Jones Industrial Average have $500 billion in cash and short-term investments on which they are currently earning barely anything. He believes “more and more companies will raised dividends” to attract investors by offering higher yields than bonds. Holding to the dividend philosophy, he says put your money into something that will earn something in a down market.

The Hennessy Total Return Fund seeks both capital appreciation and income by following the well-known dividend investing style of the Dogs of the Dow. This strategy holds the ten highest-yielding stocks in the Dow industrials. A stock with a high yield is typically one whose price has fallen, hence these are the “dogs.” The fund puts 75% of its money into the Dog stocks and the remaining 25% in short-term Treasury notes.

Year-to-date, the Total Return Fund is beating the S&P 500 return by 3.3% to 0.96%. For the past twelve months, the fund topped the index by 0.23%. However, for calendar year 2009, the index outdid the fund 26.5% to 16.9%. The fund currently yields 1.7%, but most of that is eaten up by the 1.27% expense ratio.

A good dividend ETF is the iShares S&P US Preferred Stock Index (PFF). When Hennessy talks about increasing dividends, he means the dividends paid by common stock, which can be increased whenever the companies chooses to do so. Preferred shares are more like bonds in that their payments rarely change, so this fund won’t get the upside from increasing dividends. Since preferred payouts won’t increase if the companies boost their dividends, preferred shares typically pay a higher yield. The iShares S&P US Preferred Stock Index is up 7.3% year-to-date, with a 6.9% yield and expense ratio of 0.48%