How To Get More Income from Dividend ETFs
By Ron DeLegge, Editor
January 13, 2009

SAN DIEGO (ETFguide.com) – Today’s low interest rate environment is a boon for borrowers (if they can get a loan). On the other hand, low rates have been bad for yield hungry investors.

Declining asset values in real estate and stocks has translated into a massive crowd jump into government bonds seeking stability. The only problem is that U.S. Treasuries with maturities of less than 2-years currently aren’t yielding more than 1%. The cost of “safety” is a low yield or no yield.

The yields on other rate sensitive products like money market funds and bank CDs has also fallen. According to BankRate.com, the national average on a 6-month bank CD is a humble 2.02%. Put another way, the good old days of 5% CD-rates are a distant memory. 

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Where can you find more income?

Here are four exchange-traded funds (ETFs) that focus on dividend income:

Vanguard Value ETF (NYSEArca: VTV)
This index ETF follows large cap stocks inside the MSCI US Prime Market Value Index. While not strictly designed as a dividend fund, value stocks are among today’s best yielding companies. MSCI uses 3 key factors to determine a company’s value: The book value to price ratio, its 12-month forward earnings to price ratio and its dividend yield.

The top three industry sectors represented in VTV are financials (26.11%), energy (16.31%), and healthcare (13.23%). The dividends in this fund are paid quarterly and the current yield is in the vicinity of 4.23%. VTV’s annual expense ratio is a rock bottom 0.10%.

SPDRs S&P Dividend ETF (NYSEArca: SDY)
This ETF follows the S&P High Yield Dividend Aristocrats Index. The index is designed to measure the performance of the 50 highest dividend yielding S&P Composite 1500. Selected stocks have consistently increased dividends every year for at least 25 years.

The top three industry sectors represented in SDY are financials (39.17%), utilities (19.26%), and basic materials (12.55%). The dividends in this fund are paid quarterly and the current yield is in the vicinity of 5.45%. SDY’s annual expense ratio is 0.35%.

First Trust Morningstar Dividend Leaders (NYSEArca: FDL)
The Morningstar index behind this ETF selects 100 stocks based upon high dividend yields. The index uses an active screening process to select dividend payers and then weights them based upon each security's shares outstanding, free float factor, and annual indicated dividend per share.

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The fund’s holding are rebalanced quarterly and REITs are not included in the mix. The top three industry sectors represented in FDL are financials (34.39%), healthcare (23.45%), and utilities (18.17%). The dividends in this fund are paid quarterly and the current yield is in the vicinity of 5.46%. FDL’s annual expense ratio is 0.45%.

WisdomTree Total Dividend Fund (NYSEArca: DTD)
This ETF follows the WisdomTree Dividend Index. Each of the 803 holdings are dividend weighted to reflect their proportionate share of the aggregate cash dividends they’re projected to pay in the coming year. Figures are based upon the most recently declared dividend per share.

The top three industry sectors represented in DTD are consumer non-cyclical (24.04%), financials (20.93%), and industrials (13.07%). The current yield is in the vicinity of 4.65%. DTD’s annual expense ratio is 0.28%.

Tax Considerations
Under the Jobs and Growth Tax Relief Reconciliation Act of 2003, qualified dividend income received by individuals is taxed at a rate of 15% (5% if they are in the 10% or 15% regular tax bracket). None of this changes the nature of dividend income because dividends are still considered ordinary income.

What is qualified dividend income? It includes dividends received during the year from domestic corporations (both publicly traded and private) and qualified foreign corporations.

The dividends paid to shareholders from REITs are not categorized as qualified dividend income and are not eligible for the reduced 15% tax rate. REITs are required to distribute at least 90% of their taxable income and they receive a dividend paid tax deduction. This special structure allows REITs to avoid taxes at the corporate level. 

Your Income Strategy
As we covered at the outset, low interest rates are forcing investors to look beyond low yielding money market rates and bank CDs for income. To meet your income needs you need to use the right investment products.

Dividend ETFs are an excellent choice to help you build the income portion or your investment portfolio. Even though many of these funds have been dragged down by their exposure to the financial sector, other key industries like healthcare, basic materials and utilities are represented.

Which dividend ETFs are right for you? Which ones pay the highest yield income? And how can you become a smarter ETF investor?  In our December 18th ETF picks  we assembled a comprehensive list of 38 top yielding ETFs. We’ve done most of the legwork, now it’s up to you to do the rest. Check it out.