Can Dividend ETFs Maintain Their Winning Ways?

January 4th at 2:16pm by Tom Lydon

Dividend exchange traded funds in the U.S. large cap category managed to beat the S&P 500 in 2011 while raking in plenty of cash as investors hungry for income looked far and wide for alternatives to bond funds.

Market volatility doesn’t seem to be going away anytime soon as Europe’s debt crisis continues to rage. A desire for conservative approaches to investing in stocks and paltry bond yields mean investors could continue to favor dividend-themed ETFs in 2012. [ETF Chart of the Day: U.S. Large Caps]

“In this yield-starved environment, this is the new fixed-income,” Hank Smith, chief investment officer at Haverford Investments, said in a WSJ.com report. Regarding the 10-highest dividend-paying stocks of 2011, “there’s not a dog in there,” Smith added. “If we stay in a very low-interest rate environment, the strategy absolutely has another winning year ahead.” [ETF Chart of the Day: Dividend ETFs]

Two ETFs that are positioned to  start the new year strong are iShares Dow Jones Select Dividend index (NYSEArca: DVY) and SPDR S&P Dividend ETF (NYSEArca: SDY). They are among the largest dividend ETFs along with Vanguard Dividend Appreciation ETF (NYSEArca: VIG). Don Dion for The Street reports that they have both outpaced broad based funds such as the SPDR S&P 500 (NYSEArca: SPY).

Another dividend ETF to keep an eye on is the iShares Dow Jones High Yield Equity Fund (NYSEArca: HDV,) which has gained about 7% over the past six months, reports Dion. Last year, HDV outperformed both DVY and SDY. [Dividend ETFs Under the Microscope]

HDV is different from both SDY and DVY in that it tilts to mega cap stocks. [Choosing the Right Dividend ETF]

As the new year begins, factors that are in favor of dividend-focused ETFs include ongoing market volatility, short-term interest rates that are hovering around zero and the constant threat of the Eurozone debt crisis that is nowhere near resolution. Investors may choose to invest in dividend funds to boost returns and acquire an income stream higher than 10-year Treasury yields.

“Another one of those [risk] themes that kind of falls into this: low volatility and income actually sit side-by-side, but income was one of the huge drivers in ETF new product launch success and general flows overall. Dividend-themed income funds, low volatility funds which kick off a nice income stream. Also, dividend-themed income funds that move beyond just U.S. large-cap dividends, but also international. Huge growth drivers in that area, lots of interest going on in 2011,” Scott Burns at Morningstar wrote in a recent article. “Investors–especially ETF investors–clearly are looking for income.”

SPDR S&P Dividend ETF


Tisha Guerrero 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.