Think Income

Investors looking in support of dividend paying stocks bear long had to settle for lofty and boring, the tortoises of Wall Street.  But while gradual and steady tends to win the race—long-term, dividend stocks surpass the rest of the market by an average of 2.2 percentage points a year, according to Standard & Poor’s—the exchange-traded fund market has found a way to juice those returns further.

ETF sponsors have launched dozens of funds in coming years, investing in everything from high-yielding foreign stocks to convertible securities.  Dividend ETF’s currently holds $13.5 billion in assets, up from $7.8 billion next to the start of 2006.  And they can be an accomplished deal in lieu of investors with taxable accounts, since they generate income that’s commonly taxed at the low 15 percent rate and rarely distribute capital gains, as most simply track market indexes.

But dividend ETFs—especially the recent, more exotic ones—can be tricky to evaluate.  The highest-yielding funds are loaded with financial stocks that are out of kindness on Wall Street (think bad loans and an ailing housing markets).  That’s a bulky reason why returns for domestic dividend funds are lagging the market by five percentage points this year, according to Morningstar.  Moreover, these funds may perhaps invest not solely in large-cap value stocks, the old dividend stalwarts.    The Wisdom-Tree Dividend Top 100 trust, for instance, features a 6 percent weighting in a single mining stock, Southern Copper.  The fund is based on a proprietary index of large-cap stocks, weighted by yield, and according to Wisdom Tree, it ought to be less unstable than the overall market.  Still, if copper prices plunge, this ETF might suffer.

Two of the more balanced ETFs to clash with the market are the Vanguard Dividend Appreciation fund (VIG) and Wisdom Tree Total Dividend fund (DTD).  The Vanguard fund yields 1.6 percent, lower than the 2.6 percent average for dividend ETFs.  But merely 20 percent of its fortune are financial stocks, which is supposed to give it an advantage if the sector continues to suffer.  The Wisdom Tree ETFs is more exposed to REITs, banks and other financials, but it futhermore offers an elevated yield, around 3 percent.   Both funds facet an expense ratios that are below average for dividend-bearing ETFs, less than 0.3 percent.

Investors who can carry out more risk may wish to consider a combination of recent foreign ETFs.  The iShares Dow Jones EPAC Select Dividend index fund (IDV), launched in June, holds 100 large-cap foreign stocks and yields 4.3 percent.  A new EFT from Wisdom Tree, the Emerging Markets High Yielding Equity fund (DEM), pays 6.5 percent.  Nearly 50 percent of this fund is concentrated in Taiwan, Brazil and Korea, markets that have soared in recent years and are disreputably volatile.  But owning foreign stocks can be a good hedge versus a slumping domestic market.  And income for these funds possibly will keep your portfolio running upfront of the pack.

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