After finding clarity on the tax debate, investors are returning to dividend-paying stocks and exchange traded funds in search of yield and more conservative strategies for equities.
Interest-bearing accounts like money market fund and short-term deposits are earning less than 1%. Consequently, investors are seeking out dividend-paying stocks to augment their income needs. [Death of Dividend ETFs ‘Greatly Exaggerated’]
“You’re seeing (the idea of) returning value to shareholders being reborn,” Damon Southward, chief market strategist at Briefing.com, said, reports Debbie Carlson for Chicago Tribune.
The rising demand for dividends has not gone unnoticed. Corporate America is beginning to increase dividends, and some are starting to issue dividends for the first time. For instance, Apple (NasdaqGS: AAPL) offered its first dividend last year.
Nevertheless, investors should still know the risks. Different stocks may offer payouts during certain periods of the year. Joe Lucey, president of Secured Retirement Advisors, points out that investors need to consider what’s in their entire portfolio.
“See how they fit in your portfolio,” Lucey said in the report. “This should be money that you put in your long-term investments, money that you don’t need.”
Consequently, Shawn Hackett, president, Hackett Financial Advisors, suggests that investors should look at companies with a solid record for paying dividends and the company should issue dividends on a regular basis. Hackett also warns that investors shouldn’t chase after high yielding assets.
“That’s the No. 1 red flag,” Hackett said. “People are chasing yield in this environment like I’ve never seen. We’ve seen some extremely high yields surface.”
Additionally, dividend stocks are still stocks, and investors should monitor the investments as they can lose their principal. Equities are typically more volatile than bonds.
Instead of meticulously picking out dividend stocks on your own, investors can look at ETFs with a diversified basket of dividend-paying stocks. The largest dividend ETFs include:
- Vanguard Dividend Appreciation ETF (NYSEArca: VIG): 2.37% 12-month yield
- Vanguard High Dividend Yield (NYSEArca: VYM): 3.23% 12-month yield
- iShares Dow Jones Select Dividend Index (NYSEArca: DVY): 3.70% 12-month yield
- SPDR S&P Dividend ETF (NYSEArca: SDY): 3.28% 12-month yield
- Schwab U.S. Dividend Equity ETF (NYSEArca: SCHD): 2.86% 12-month yield
- WisdomTree LargeCap Dividend Fund (NYSEArca: DLN): 2.98% 12-month yield
For more information on dividends, visit our dividend ETFs category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own DVY.