Why Dividend ETFs Are Portfolio-Compatible | ETF Trends

After a recession strikes, the priority of many an investor is to locate areas that can help deliver gains. Overlooking the potential of dividend exchange traded funds (ETFs) could leave you missing some great opportunities.

A dividend-focused ETF can help boost returns during bear markets and provide an income stream during bulls. Ilan Moscovitz for The Motley Fool reports that when he ran the numbers for the 2000-2002 bear market, he found that dividend-paying stocks outperformed non-dividend-paying stocks by an incredible 47% on average. Furthermore, according to research from professors Kathleen Fuller and Michael Goldstein, from 1970 to 2000, dividend-paying stocks outperformed non-dividend payers during down markets by an average of 1.5% per month. [Other reasons 2010 is shaping up for dividends.]

First off, to consider a dividend stock, it should fit this criteria:

  • A greater-than-3% yield
  • A recent dividend increase
  • Growing revenue

Dividend ETFs can give you an added benefit: the providers have done the sorting for you, and one fund can give you exposure to dozens of high-quality dividend payers. Look under the hood to see if you’re getting the exposure you want when shopping for a dividend fund. Keep in mind, too, that some of them have heavy weightings in the financial sector.

Utility stocks tend to do well with high dividend yields for the long term. Considering that, the biggest appeal of utility ETFs may continue to be what has been the sector’s main drawing point. As of late December, the median yield of the 26 utilities funds followed by Morningstar was 2.9%, outpacing the 1.2% yield for large-company “blend” funds and the 2.3% yield of the S&P 500, reports Dale Buss for The Wall Street Journal.[Why dividend ETFs are worthy of your portfolio.]

Overall, most forecasts are calling for dividend growth in 2010 as many of the dividend slaughters are over and large  firms should boost their 2010 payouts, reports ETF Professor on Benzinga.