Investors can lower risk in their stock portfolios with dividend ETFs but they should keep in mind the equity-based funds shouldn’t be substituted for bonds.
When playing the income game, exchange traded fund investors have been increasingly reaching for yields.
According to fund tracker EPFR Global, investors funneled $34 billion into dividend stock funds so far this year, the Wall Street Journal reports. With the 1.60% yield in the 10-year Treasury market and the 2.3% yield in the S&P 500, investors have turned to dividend picks as a way to generate more income. [Why There is no Substitute for Dividend ETFs]
However, investors should not confuse dividend stocks with fixed-income assets, especially during volatile market conditions. For instance, in the third quarter of 2011, the WisdomTree LargeCap Dividend ETF (NYSEArca: DLN) dropped 9.7% while the Barclays U.S. Aggregate Bond Index rose 3.8%. [Caution: Dividend ETFs are Not Bonds]
Moreover, Owen Murray, director of investments at Horizon Advisors, warns that investors should not be overexposed to the highest-yielding stocks – high payments usually indicate that the company is in trouble or the yield is unsustainable.