Investors trying to bolster yield in their portfolios have made dividend exchange traded funds one of the hottest investments the past two years. There is speculation Apple (NasdaqGS: AAPL) may announce a dividend at its shareholder meeting Thursday, which could drive further interest in the category.
However, dividend ETFs come with risks that investors need to consider before jumping in.
Since dividend funds invest in stocks they have “significant exposure to market risk,” writers Larry Swedroe at CBS MoneyWatch.
“This means they have entirely different risks than bonds, which are meant to be safe havens during difficult market periods,” he said. [Best Dividend ETFs]
Although dividend ETFs may “provide higher yields than bonds in this current environment, keep in mind what would likely happen if the market heads south again,” Swedroe added. “Not only would the value of the stocks drop, but the companies may choose to trim or even eliminate their dividends. Certainly, that’s what we saw in 2008.” [Bubble in Dividend ETFs?]
Low bond yields and a preference for conservative equity strategies have resulted in investors piling into dividend ETFs.
Stock funds as a group saw net redemptions last year, but those focused on dividends gathered about $3 billion, according to Morningstar. Meanwhile, dividend ETFs took in $14.3 billion.