During this crazy bear market and market meltdown, optimistic investors have been turning to dividend-rich exchange traded funds (ETFs) to answer their prayers. But what if the funds have lost more than what they yield? What’s the point of them then?
One reader of ours wonders:
Can someone please explain to me why ETFs that have lost more over the last month than their dividend yield would be attractive? Or stocks for that matter? Isn’t this yield only attractive if you think they have bottomed? Is there something I am not getting about dividend stocks??
The answer: Dividend yields on a particular market segment are a concrete measure of the market’s valuation levels-whether those stocks are offering attractive terms to entice you to invest in them compared to their competing asset classes.
Stocks’ biggest competition comes from either cash or bonds. The short term returns on money markets are at or near zero today. The 10-year U.S. government bond is yielding under 3%, the lowest level in more than 50 years.
These low yields in bonds offer the least enticing terms this century for bonds, and the primary reason investors are accepting these low yields today is an extreme amount of risk aversion about losing money in stocks.
The Dividend Yield on a basket of large cap us dividend stocks measured relative to the dividend yield on the S&P 500 is also another valuation measure to gauge the attractiveness of the dividend basket.
Of course, the market always could move more in the short term than the dividend yield offers you. But owning stocks was never supposed to be a risk free proposition, and we believe having strong underlying valuation metrics such as the dividend yield underpinning your investment is the best way to minimize that risk.
Simon Maierhofer for ETF Guide notes that double-digit capital gains in 2008 pushed dividends to the back burner. As the Dow Jones Industrial Average and S&P 500 touched on new highs in 2007, dividends were simply a moot point to most investors.
But now, investors are hungrily on the hunt for yield again. Here are nine ETFs delivering such yields:
- iShares FTSE NAREIT Retail ETF (RTL): which got slaughtered in 2008, but shoots of an impressive yield of 13.6%
- PowerShares Financial Preferred Portfolio (PGF), we all know how well this sector performed last year, but PGF yields 13.6%
- iShares S&P U.S. Preferred Stock ETF (PFF), a yield of 10.8%
- iShares iBoxx High Yield Corporate Bond ETF (HYG), producing a yield of 10.6%
- PowerShares Insured National Municipal Bond Portfolio (PZA), a 5% yield, but keep in mind that this yield is partially tax-free
- iShares DJ Select Dividend ETF (DVY), a fairly well-established ETF that has a generous exposure to financials and generates a yield of 6.9%
- State Street’s S&P Dividend ETF (SDY), shooting off a yield of 6.3%
- SPDR DJ Wilshire Large Cap Fund (ELV), producing a modest yield of 5.1%
- iShares Russell 1000 Value ETF (IWD), generating a yield of 4.2%
Although these yields are very tempting, remember that the markets have really taken a hit in the last year. Remember to watch the trendlines and do your homework before throwing any extra change into the market.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.