Why There is no Substitute for Dividend ETFs

December 13th at 6:20am by Tom Lydon

Dividend stocks and exchange traded funds are a great income-producing investment tool and can bolster a retirement account in a yield-starved market. A dividend is also a bellwether for a high quality, stable stock that can suit any portfolio well. Investors will be hard-pressed to find a comparable investment even if we fall over the fiscal cliff.

“When we look at stock investing, we’ve always advocated buying high-quality companies at a discount to their intrinsic value and holding them for a long time, so you can realize the value of that company. And dividends are a good signal that a company does have those potential competitive advantages and that there really are solid earnings and really solid cash flow behind what that business is doing.If you didn’t have that cash flow coming in the door, if it’s just accounting profits or maybe a company that just sees sustained losses, they wouldn’t be able to come up with that cash to pay out those regular payouts to investors,” Jeremy Glaser wrote for Morningstar. [A Global Dividend ETF With an 8% Yield]

Dividends are important for structural reasons, too. Investors are looking for total return, so to ignore the dividend sector is to give up a great portion of the reward. Historically, the S&P 500 has about 40% of total return that stems from dividends, not just price appreciation, reports Glaser for Morningstar. [MLPs and Dividends are Hot, ETF Provider Says]

A dividend payout is also an indication that a company is healthy. While a dividend stream is not an end-all, be-all in choosing a stock, it can be a sign that a company is on a good track. Especially when one considers an emerging markets company -  a dividend payout is indicative of good cash flow and solid earnings. Jason Sripp for Morningstar also points out that a dividend flow is a sign of healthy management within a company. When an investor receives a dividend stream, they are essentially shareholders in the company. A business that pays out a dividend stream is considerate of the shareholders and is getting out a portion of the profit back out to the investors. [Will Dividend ETFs Fall Over the Fiscal Cliff?]

The biggest obstacle for dividend stocks and ETFs currently is the tax rate hike that is hanging in the air alongside the fiscal cliff. While there may not be a bevy of alternative investments around that are commensurate to dividend stocks, there is no reason to ditch all dividends just based on capital gains. Even if there is a correction in the sector, dividend payers are still going to keep paying out, and investors are still getting the best possible yield that is available. [Caution: Dividend ETFs are not Bonds]

“It seems that there probably will be some kind of deal reached, and chances are that the marginal tax rates aren’t going to change for all taxpayers. So, there will probably be a big chunk of people who are interested in dividend stocks who aren’t in that top bracket, who aren’t going to see their rates raised by quite that magnitude that you would at the very top of the marginal rate,” Glaser wrote.

Dividend ETFs:

  • iShares Dow Jones Select Dividend Index Fund (NYSEArca: DVY) 3.49% yield
  • iShares High Dividend Equity Fund (NYSEArca: HDV) 3.28% yield
  • SPDR S&P Dividend ETF (NYSEArca: SDY) 3.14% yield
  • Vanguard High Dividend Yield Index Fund (NYSEArca: VYM) 2.97% yield
  • Vanguard Dividend Appreciation (NYSEArca: VIG) 2.08% yield
  • WisdomTree Dividend Top 100 Fund (NYSEArca: DTN) 4.57% yield

WisdomTree Dividend Top 100 Fund

 

 

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.