Considering the paltry yields in U.S. Treasury bonds and money market funds, investors have turned to dividend-producing stocks and exchange traded funds to help generate some extra cash. However, like with any investment product, investors should take a moment to look over what they are getting themselves into, and the potential risks.
Different dividend-focused ETFs follow different strategies and portfolio construction methodologies.
For instance, the Vanguard Dividend Appreciation ETF (NYSEArca: VIG) tracks companies that have increased dividends for at least ten consecutive years, offering access to steady and stable firms; however, the fund does not provide access to high yielding stocks as they are riskier in nature. Consequently, VIG only has a 2.27% 30-day SEC yield. In comparison, the S&P 500 yields 2.11%. [An ETF That Tracks Quality Dividend Stocks]
Dan Caplinger for DailyFinance questions the ETFs growing focus on yield generation. For example, he highlights the new First Trust Nasdaq Technology Dividend Index Fund (NYSEArca: TDIV) and the low yield barrier for entry – the ETF includes companies with dividend yields of under 1%.
James Bianco, president of Bianco Research, at the The Big Picture blog emphasizes that dividend stocks should be viewed as a slightly less risky form of stock investing.