The Dividend ETF Comeback

October 21st at 12:00pm by Tom Lydon

Investing in the markets and exchange traded funds (ETFs) come with a variety of risks, but stashing away some cash into some investments that yield dividends may help mitigate some of those risks while generating extra income.

Solid corporate earnings from a number of large corporations have led to dividend increases, reinstatement or, in some cases, dividends for the first time ever.

Historically, dividends have provided a hedge against inflation since dividend growth usually eclipsed the rate of inflation, writes Jeremy Schwartz for IndexUniverse. [Dividend ETFs: Which Companies are Paying?]

Though dividends have been averaging on the low side during the 2000s so far, WisdomTree believes that the current investment environment may be the basis for a shift toward a greater emphasis on dividend-paying equities. [How to Easily Find High-Yielding ETFs.]

Dividend indexes either hold all dividend-paying equities for a segment of the market or the indexes place screens to pick out select dividend-paying equities in a segment of the market – the latter type focuses on high-yielding equities, but loses some of its representativeness.

It should be noted, that dividend-yield-weighted or dividend-per-share weighted indexes have no scaling mechanism for company size and hold small-cap and mid-cap characteristics of equally-weighted indexes. [The Value of Mid-Cap ETFs.]

One would think that stocks with below-average dividend yields are reinvesting earnings back into their business so as to add higher dividend growth over the long term, or vice-versa, but WisdomTree argues otherwise. WisdomTree’s research found that a basket of higher-dividend-yielding stocks may actually produce higher dividend growth than the S&P 500.

There are dozens of dividend ETFs in the ETF Analyzer, which can be sorted by yield, expense ratio and performance. Some dividend ETFs include:

  • PowerShares Dividend Achievers (NYSEArca: PEY)
  • WisdomTree LargeCap Dividend Fund (NYSEArca: DLN)
  • Vanguard Dividend Appreciation (NYSEArca: VIG)

In State Street Global Advisors‘ recent snapshot report, the firm found that dividend investing remains popular, with the SPDR Dividend ETF (NYSEArca: SDY) increasing $3.5 billion in assets and year-to-date inflows of $2 billion, reports Murray Coleman for Barron’s.

For more information on dividends, visit our dividend ETFs category.

Max Chen contributed to this article.

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.