Looking for some free money? I don’t have any but I do think I have the next best thing: Dividend ETFs.
2013 has been another year where paltry rates on fixed-income investments have motivated investors to seek out alternatives. Many have rediscovered Dividend ETFs, those Exchange Traded Funds that focus on paying dividends. There are a lot to choose from but whether you got a gift that will keep on giving or a lump of coal in your stocking depends on where and what you invested in. Here, courtesy of research provided by ETFdb.com, you’ll find the 2013 Dividend ETF Roundup, a review of the Best and Worst paying players.
While 2013 has been another banner year for ETFs that focus on dividends as investors have refocused on this space to make up for the lack of yield in the traditional fixed-income space, there have been plenty of losers in this space as well. Getting a high dividend on a stock that has lost ground is no joy. But getting a high dividend on an appreciating stock is a welcome bonus in a low yield world.
Whether you choose to participate in this space through mutual funds, individual stocks or ETFs, you’ll find that having these in your portfolio will help you improve your bottom line and reduce your overall risk exposure.
In my practice, I have consistently allocated a good portion of funds to ETFs that have a clear dividend focus. Why? Because facts speak volumes. And by using an ETF, my clients can get access to broad diversification compared to owning individual stocks that may have their own company-specific risks.
Consider these facts:
- Dividend-paying stocks tend to be less volatile and exhibit lower operational risk than non-dividend paying equities.
- Dividend growth is more reliable and less volatile than depending on earnings growth.
- Dividends have been a major part of the S&P 500’s 9.3% total return from 1930 through 2010.
- Market history shows that nearly half of the return in the stock market has come from dividends.
- Dividends from stocks offer a clear alternative to fixed-income with more than 25% of S&P 500 companies paying more than the 2+% yield of US Treasuries and nearly 20% more yielding more than 4%.
- Dividend-paying companies have offered strong inflation protection during the 1974-1980 period when their total returns helped stocks outpace nearly 10%+ inflation and a dismal performance for bonds.
Below, is the ETFdb list of the best and worst performing dividend ETFs from 2013. Please note that these are funds that are classified as dividend-focused, and not those that simply pay out a dividend. Funds that were launched this year were excluded from this list as they did not have a full calendar year under their belts.
By way of full disclosure, I use DVY, SDY, VYM and SDOG in the MarketFlex Portfolios I manage. I also use another Vanguard offering, VIG, which didn’t make this list but is a highly rated and consistent player. Philosophically, I avoid Exchange Traded Notes (ETNs) because I prefer not to rely on the credit of the issuing company. Likewise, I avoid leveraged products because they can be way too volatile for what I’m trying to do for clients. I prefer to use ETFs and tend to choose those which exhibit liquidity (at least 50,000 share volume daily) which helps minimize wide pricing spreads. But some of the others on this list do rate for additional research for possible use in future
iShares Select Dividend ETF (DVY)
24.92%
High Income ETF (YYY) 7.78%
SPDR S&P Emerging Markets Dividend ETF (EDIV) -13.68%
As eye-popping as some of these numbers are (good and bad), what really matters to me is not just the sexy story behind the idea of the ETF but the consistency of performance, the quality of the underlying firms, the history of growing dividends and underlying trading volume. As you can see, some of the worst performers were in areas of the market that just didn’t do well like commodities/natural resources or emerging markets. No amount of dividend payout was going to overcome the downward slide in the values of the underlying shares of the companies in these ETFs. On the other hand, some of this year’s best dividend ETF performers are worth more than a second look to add to a portfolio.
