Dividend ETFs

According to S&P 500, the stock market has returned disappointing results for the past 12 years. Any investors approaching retirement who were expecting good returns will be disappointed considering the high returns from the boom years of the 80s and 90s. These could be considered very distant memories. Investor decisions have changed, they are moving to ETFs and dividend yielding stocks and abandoning capital gains plans. This move to dividend ETFs is, in effect, a return to the basics of investment before the modern portfolio plans and federal capital gains taxes shifted the balance away from this form of investment. Analysts have pointed out that in the past 12 years dividends have been the only way of earning revenue from your investments.

Choices of dividend focused ETFs
Today there is actually a bewildering number of dividend ETFs available, so it may be difficult trying to find exactly the right one that works for you. Whilst all of the dividend ETFs will pay out dividends, and this is the central part of their focus, there are a number of key differences that investors should understand and therefore plan the right the strategies to adopt. There are more than a dozen dividend ETFs that are focused on the US market alone. It is possible to group the three different major groups of dividend ETFs. These are, high dividend yield, high dividend growth rate and dividend weighting.

High dividend yield
This type of dividend ETF is often referred to as dividend investing. It focuses on generating high current income whilst it keeps capital gains as a low priority objective. This is the most conservative dividend and is particularly suitable for those who want to make low risk investments, but still get a satisfactory return on their money.

An example of this type of high dividend yield fund is the ETF Select Dividends iShares from Dow Jones. It is listed as DVY and it is actually the longest running dividend focused ETF. It adopts a totally focused high yield strategy and this makes it unique. This ETF has consistently performed extremely well and it is America’s top stock performer based on dividend yield. In order to remove risks in this ETF any companies who are not showing a positive 5-year dividend per share growth rate will be removed. This will be matched with a check that no more than 60% of earnings are used when making a dividend payout. Having filtered out weaker companies, the remaining companies are ranked and the top 100 selected. This approach has been highly successful and has contributed to a treasury beating 10-year yield at a low cost rate.

High dividend growth rate plans
This category concentrates more on the growth rate of dividends and puts less emphasis on dividend yield itself. Examples of these types of ETFs are Vanguard Dividend Appreciation ETF, listed on the NYSE as VIG, and Dividend Achievers from PowerShares ETF, listed on the NYSE as PFM. These ETFs are modeled on and rival the Mergent Dividend Achievers Index. In order to be considered for inclusion in the Index, it must have been able to demonstrate rising annual dividends for at least 10 years or more.

The reason why this type of ETF is attractive is that the companies in the ETF pay regular and increasing dividends. This indicates the stability and health of the company in question. Paying attractive dividends causes company management to follow good practices, avoid empire building, and embark on mergers that actually have little value. Dividends are the most transparent way a company can demonstrate its financial strength, as the dividends need to be paid in hard cash.

Dividend weighting ETFs
This type of ETF is a form of hybrid between the high growth strategy and the high yielding category. PowerShares can offer this type of ETF. The Dividend Achievers is a high yield ETF, listed on the NYSE under PEY. The fund is designed like the Dividend Achievers 50 index from Mergent. This Index contains the highest yielding 50 companies in the broader Mergent dividend index.

Standard & Poor’s actually has its own competitive strategy that is named Dividend Aristocrats. This extends beyond their Dividend Achiever strategy. S&P use its Index called the Dividend Aristocrats to measure the results of 500 companies. Over a 25-year period, this ETF has consistently increased its dividend payout.

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